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The U.S. added a quarter-million jobs in September, and this despite fears that the labor market was cooling, which can signal a recession. The Indicator's Darian Woods asked one economist how the government could escape from recessionary patterns.
DARIAN WOODS, BYLINE: Jon Steinsson is a macroeconomics professor at UC Berkeley. I asked him if the teetering rise in unemployment that we had over the summer could be a flashing red alert.
JON STEINSSON: That's absolutely right if you look at history.
WOODS: Jon said that there is this pattern called the Sahm rule. That pattern has stated, essentially, that when unemployment rises from its year-long low by half a percentage point, you're in a recession, and then unemployment tends to shoot way up.
STEINSSON: That rule has basically always been true for, like, more than 50 years.
WOODS: Jon thinks the Sahm rule may not apply this time, though. He says there is more to the possible recession story.
STEINSSON: Usually, there's some reason behind it, like, you know, in '08, it was the banking crisis. In '01, it's the bursting of the dot-com bubble. So you can point to things in many of those other instances where you say, OK, there's some reason why unemployment started to rise very rapidly.
WOODS: Jon says there are often two big triggers in particular.
STEINSSON: Most of the recessions are either accompanied by a very sharp increase in oil prices or very tight monetary policy or both.
WOODS: Right now, Jon says, we don't see a gigantic shock in the U.S. economy. Despite the wars in Ukraine and the Middle East, oil prices are high, but not through the roof. And the Federal Reserve is loosening monetary policy right now, not hiking interest rates. But what if unemployment was to jump up? What can history teach us?
STEINSSON: It's easier to break the economy than to rebuild it. Rebuilding takes a long time. So you take the 1990s, where we had almost 10 years of continuous expansion. And most economies thought by the middle of it, oh, the unemployment rate is down to five point something. It's probably not going to go much lower. But that would turn out to be wrong.
WOODS: Jon Steinsson says a major exception to the slow recovery pattern can be seen during the COVID pandemic.
STEINSSON: That's the only recession that is totally different.
WOODS: After the big spikes in unemployment in the spring of 2020, jobs rapidly came back. So is it true that the government can do things to really speed up the recovery process? Jon points out that it could be the case that COVID was special. A lot of people were on temporary layoffs or furloughs at the start of COVID. That was unusual and could explain the quick recovery.
STEINSSON: But the other possibility is that it was really the extremely large stimulus that the government engaged in after COVID that kind of kick-started the economy much faster than in a normal recession. So maybe we overdid it a bit after COVID. But that's a tantalizing possibility that, next time, maybe the government just should be more aggressive in its stimulatory policy. Now, I don't know the answer. We have, like, one observation that's very different.
WOODS: So I understand your agnosticism, but do you have a hunch?
STEINSSON: Of course one wants to believe it's easier to recover from recessions than we thought prior to COVID. If I were in government, next time there's a recession, I would definitely advocate trying it. Let's see if it works again.
WOODS: Darian Woods, NPR News.
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