Tracking Labor Market Stress

A new Labor Market Stress Indicator (LMSI), which tracks state-level unemployment acceleration, offers a more granular assessment of economic health by distinguishing widespread distress from localized downturns. This indicator suggests the July 2024 national Sahm rule recession signal was a false alarm, as the observed labor market stress was geographically limited and short-lived, unlike previous recessions. As of mid-2025, the LMSI indicates stable labor market conditions and a low recession probability, offering institutional investors a refined tool for assessing economic risk beyond aggregate national data.

Analysis

A new state-level Labor Market Stress Indicator (LMSI) provides a more granular and arguably more accurate assessment of recession risk than traditional national aggregates. This analysis is particularly relevant given the conflicting signals from the national Sahm rule, which indicated a potential recession in July 2024, and the inverted yield curve that persisted until late 2024. The LMSI's methodology, which counts the number of states with unemployment rising at least 0.5 percentage points above their 12-month low, reveals that the July 2024 labor market stress was neither geographically widespread nor sustained. It briefly met the 30-state threshold but quickly reversed, while the share of the labor force in affected states (~70%) remained below the typical 75% recessionary benchmark. This contrasts with historical recessions where both metrics climbed significantly and stayed elevated. As of June 2025, the data shows a stable labor market, with only the District of Columbia exhibiting stress, corresponding to just 0.2% of the U.S. labor force. Consequently, an associated statistical model places the current probability of recession at a low 5%, suggesting the U.S. economy is in a stable expansionary phase.

Key Decisions for Investors

• Given that the LMSI points to a low probability of a near-term recession and debunks the July 2024 'false alarm', investors may consider reducing defensive positioning and maintaining exposure to assets sensitive to economic growth.
• Institutional investors should incorporate the new Labor Market Stress Indicator, particularly the 30-state count and the 75% labor force share thresholds, into their macroeconomic monitoring frameworks as a key supplement to traditional indicators like the Sahm rule and yield curve.
• Portfolio managers can use the indicator's state-level data to differentiate between localized economic weakness and a systemic downturn, paying closer attention to bellwether states like Illinois and Ohio as more reliable signals of national distress than isolated, resource-driven states like Alaska or North Dakota.