Key Points

  • Researchers at the Federal Reserve Bank of San Francisco said unemployment insurance claims data across all 50 U.S. states highlight the stability of the U.S. labor market. Meanwhile, some dissenting policymakers believe there are signs of weakness in the job market and advocate for an interest rate cut at the Fed's mid-September meeting.
  • The researchers tracked unemployment insurance claims across states and over recent decades, applying a recession risk indicator known as the "Sahm Rule." They found that when unemployment rates in 30 or more states rise by at least 0.5 percentage points above the lowest three-month average in the prior 12 months, the U.S. faces a recession.
  • "Applying this analysis to the latest data suggests the labor market remained stable through mid-2025," researchers Rohit Garimella, Òscar Jordà, and Sanjay Singh said in a research report released Monday.

In-Depth Analysis

The report's release follows two policymakers voting against the Fed's July 30 decision to hold its key interest rate steady. These two officials advocated for a rate cut to address signs of softening in the labor market. This marks the first time since 1993 that two Fed governors have simultaneously dissented.

The report also comes ahead of a two-day meeting of central bank officials starting Thursday. The meeting brings together central bank governors from the U.S. and other countries in Jackson Hole, Wyoming, under the theme "Reassessing the Effectiveness and Transmission of Monetary Policy."

Since May, some labor market data have shown signs of weakness. For example, the three-month average of U.S. nonfarm payroll growth from May to July has plummeted to 35,000 from 127,000 in the February-to-April period.

Fed governors Michelle Bowman and Christopher Waller dissented last month, arguing that the central bank should cut the federal funds rate by 25 basis points from its current level of 4.25% to 4.5% to avoid further labor market weakening.

Fed Chair Jerome Powell holds a different view. At his post-meeting press conference on July 30, he said, "Labor market conditions remain solid," while inflation is "still somewhat above our 2% longer-run goal." He also noted that "the economy is not performing as if restrictive policy is weighing on it" and emphasized that the unemployment rate remains low.

Other Fed officials have recently echoed Powell's stance, warning that the central bank should not rush to cut rates before ensuring inflation steadily returns to its 2% longer-run target.

Atlanta Fed President Raphael Bostic said Wednesday that policymakers should take time to assess the latest data before deciding whether to adjust the benchmark interest rate. He noted that the health of the labor market—with unemployment at an unusually low 4.2%—gives policymakers the "luxury" of time to clarify the best path forward for monetary policy. "You have a fairly strong labor market, so the risks to our maximum employment mandate are different from those to the inflation mandate," he said. "I think we have some space right now."

San Francisco Fed researchers said the new labor market stress indicator provides deeper insight than aggregate employment data by accounting for differences across U.S. regions. "Averages of national economic indicators mask important regional differences," they noted, pointing out that since mid-2022, Colorado's unemployment rate has risen by 2 percentage points, while Hawaii's has barely changed.

"Experience shows that recessions become self-reinforcing when unemployment spreads broadly across states and industries," the researchers said. "If economic weakness remains localized, healthy regions can offset the impact on distressed areas through tourism inflows, interstate supply chains, and federal transfer payments, thereby preventing a nationwide contraction."