While America’s labor market may not be collapsing, Moody’s Analytics has highlighted that it is inching steadily closer toward a key recession indicator, with analysts now placing the probability of an economic contraction at around 40%.
According to the Bureau of Labor Statistics (BLS), the unemployment rate for November edged up to 4.6%, continuing the creep higher that analysts have been nervously monitoring throughout the year. The BLS noted a meagre 64,000 roles were created last month, showing little net change from April this year.
While 4.6% is not a dire figure—around 4% is seen as a reasonable rate of unemployment in a relatively stable economy—it is markedly higher than last November, when it was 4.2%. But it’s not necessarily the rate of unemployment that is making economists nervous. Rather, it’s the broader trend of decline and what this demonstrates about the trajectory of the economy.
In the most recent episode of Moody’s podcast Inside Economics, its chief economist, Mark Zandi, and senior director of economic research Dante DeAntonio observed that America is close to triggering the Sahm Rule.
The Sahm Rule, invented by former Fed economist Claudia Sahm, is a recession signal that is activated when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more, relative to the minimum of the three-month averages from the previous 12 months. In November, it stood at 0.43.
“We didn’t quite trigger it this month, but we’re sort of on the precipice,“ DeAntonio said. “If it stays at 4.6% next month we’ll trigger the Sahm Rule again. It’ll be exactly at the threshold, just like we were in the middle of 2024.”
While the Sahm Rule is fairly accurate, the U.S. economy did not in fact fall into recession last year—thanks in part to the Fed engineering a “soft landing” via interest rate cuts. So will the same rule apply now and into 2026?
Cris deRitis, deputy chief economist at Moody’s Analytics, said he’d place a 40% likelihood on a recession occurring next year, explaining: “The trends are not our friends here.” His call is somewhat elevated from the consensus of Wall Street, which places the odds at 30% to 35%.
DeAntonio and Zandi agreed with their colleague, with the latter saying: “The thing that makes me nervous and adds to my level of angst … [is] one reason why job growth is weaker is less labor supply, because of the immigration policy. That gets you to the 50K to 75K break-even monthly job number. That by itself, if nothing else was going on, is already pretty weak, and that goes to lack of bodies and lack of people to work.” The break-even number is the monthly jobs growth figure needed to keep the unemployment rate steady.
Demand for workers is falling, and AI is a reason
If the unemployment level is relatively stable because of lack of supply, that means demand from employers is incredibly weak, Zandi said: “We could trace it back to the tariffs; we can trace it back to some of the other deglobalization efforts that the administration has engaged in, including immigration policy, because immigrants are consumers … but the other factor is AI.”
So far the impact from AI has been only “modest,” the Moody’s economist reasoned, perhaps impacting younger market entrants as opposed to the wider market. But what happens when the productivity gains from AI really become clear?
“That’s at least the betting in the stock markets. Stock investors are buying AI stocks thinking that we’re going to see big adoption rates by businesses, that it’s gonna raise productivity growth, it’s gonna raise profitability … If they’re half right or even a quarter right then we’re in a world of outright job decline, all else being equal.”