Why higher U.S. unemployment is a worry

The U.S. labor market has proven strikingly resilient, with many indicators pointing to some of the healthiest conditions in modern times. But Friday's jobs report offered cause to worry about whether it will last.

Why it matters: The unemployment rate, while still very low, has risen substantially since the spring. Historically, that rarely happens except in the run-up to a recession.

• Unemployment jumped from 3.4% in April to 3.9% in October. As recently as the summer, one would have described the jobless rate as bouncing around at a low level. Now it looks like a more decisive uptrend.
• Historically, once the rate rises by that much, it usually keeps rising.
• A common rule of thumb known as the Sahm Rule already points to an elevated risk of recession.

By the numbers: Created by former Fed staff economist Claudia Sahm, the rule looks at the gap between the three-month average of the unemployment rate (currently 3.83%) and compares it with the lowest three-month average over the past year (3.5%, reached in the spring).

• When the gap between those numbers exceeds 0.5 percentage points, it is a strong real-time indicator that a recession is already underway.
• Right now, the indicator is still below that point, at 0.33. But when in that range, research from Ryan Nunn, Jana Parsons and Jay Shambaugh found, there are historically 40% odds a recession is either already underway or will be soon.

What they're saying: Skanda Amarnath with Employ America argues in a note out Monday that there are some reasons to be less alarmed by the recent surge in joblessness than that historical record would suggest.

• The jobless rate among adults in their prime working years, 25 to 54, has risen by less than the overall rate, and the employment-t0-population ratio has held up well.

• He sees reason to think there could be issues with the Labor Department's seasonal adjustment process that are exaggerating unemployment now, but could lower it in the future.

Yes, but: "Once unemployment rates rise beyond a certain point, they tend to snowball and policymakers are playing a dangerous game of catch-up," Amarnath wrote.

• "For that reason, even if it proves to be a partial data irregularity, the Fed should be far more cautious now than they have shown thus far," he added.

The bottom line: The post-pandemic recovery has been weird in all sorts of ways, with historically useful economic relationships and rules of thumb breaking left and right.

• It wouldn't be shocking if the Sahm Rule and momentum effects in unemployment turn out to be among them.