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The Biden-Harris administration just suffered a new economic blow.
The U.S. unemployment rate unexpectedly rose last month and job gains slowed, fueling concern that the economy may be headed for a recession.
The jobless rate rose to 4.3 percent in July — its highest level since late 2021, the Labor Department reported Friday. Though that number is still low by historical standards, it comes after more than two years of unemployment below 4 percent — the bright spot in an economy battered by rising prices.
More concerningly, the data suggests that the job market is now weakening more quickly as high interest rates bite into spending and investment, raising questions about whether the U.S. might be entering a downturn — something few economists were worried about just a couple of months ago.
That’s bad news both for Vice President Kamala Harris as she aims to pitch voters on her candidacy for president, and for the Federal Reserve, which opted this week not to ease off on the economy even as inflation has cooled to below 3 percent.
“Fed Chair [Jerome] Powell made a serious mistake not cutting interest rates,” Sen. Elizabeth Warren (D-Mass.), who has been calling for rate cuts for months, said in a post on X. “He’s been warned over and over again that waiting too long risks driving the economy into a ditch.”
The economy added a net 114,000 jobs last month, a pace that is slower than that of previous months but still within a healthy range.
Powell on Wednesday characterized the economy as having moved from overheated to more normal conditions but added: “If we start to see something that looks to be more than that, then we’re well-positioned to respond.”
Recession fears will particularly center on an indicator, known as the Sahm rule — named for former Fed economist Claudia Sahm — that suggests the economy is facing a recession when the three-month average jobless rate increases by half a percentage point from its lowest level over the course of a year.
Friday’s employment report brings the economy into that territory.
Still, it’s more of a statistical regularity than a guaranteed prediction tool, and Sahm told POLITICO this week that this time could be different. (The benefit of the rule is that it’s an early warning system that points to recession before other data become clearer.)
“We don’t know that we’re in a recession yet; there are reasons to doubt the Sahm rule, but this is a big jump and we’ve reached it,” said Diane Swonk, chief economist at KPMG. “This is flashing red.”
Last week, the government reported that GDP grew at a 2.8 percent pace in the second half of the year, hardly a sign of an impending downturn.
“I feel confident that we are not in a recession,” Sahm said. The labor market has provided an economic bulwark against some of the downward pressure created by higher interest rates, she added. It’s possible that the rising unemployment rate might be due to new immigrants entering the workforce — which could help the economy expand.
But at a more basic level, “we’re headed in the wrong direction,” she said ahead of the jobs report. “Unemployment has been rising — and rising gradually. It has been rising for over a year now.”
Sam Sutton contributed to this report.
