This time may well be different

Throughout the summer, global financial markets demonstrated extreme volatility, which was to a large extent caused by the state of the US labour market. Since the beginning of the year, the US unemployment rate has been trending higher, increasing to 4.1%¹. Historically, such an increase has coincided with a recession in the US. The markets were thus worried that the higher unemployment rate was signalling a recession was imminent, which would result in lower corporate profits. 

This helps explain the global equities market sell-off that occurred in early August and, to a lesser extent, again in early September, following the releases of US Employment reports. But as the saying goes, this time may be different. 

The US unemployment rate is still low
The jobless  rate has increased but has done so gradually and from a very low base: the unemployment rate hit 3.4% in 2023, a 55 year low¹. Moreover, the August rate of 4.1% cannot be deemed "elevated," given the average long-term rate of 5.5% to 6%. 

Therefore, the recent rise can be interpreted as a normalisation of what was an overheated market. Additional metrics, like the ratio of the number of job vacancies to unemployed, also suggest that labour market tensions are only easing (not collapsing), reverting to their pre-Covid levels. 

It's important to understand why it’s rising
Furthermore, the reasons for the upswing in the unemployment rate do matter. The number of people losing their jobs has increased, however, a large part of the rise comes from an increase in the size of the labour force². This means that while there are more people  unemployed, this is not mainly due to redundancies, but because more people are entering the workforce and are having trouble finding work. This is consistent with a still-tight labour market, not of a recession-type environment. 

Profit margins point to a soft landing
Finally, the unemployment rate is at best a coincident indicator. Typically, it’s a lagging one, and so predicting a recession using this metric alone is far from ideal. US profit margin levels are a far more reliable - and forward-looking - measure. The explanation for this is straightforward: businesses typically reduce both their workforce and investment spending when profit margins are being squeezed, which eventually triggers a recession.
Despite the current environment of rising interest rates and wage costs, US profit margins are still high – albeit no longer at record levels. As a result, companies do not need to change course quickly. It’s still likely that the US will experience a so-called soft landing, where a period of high growth is followed by a gentle moderation and not a hard recession. If so, this time would indeed be different.