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A labor market indicator that has reliably signaled the start of recession could appear in coming months. The Sahm rule (named after the former Federal Reserve economist who identified it) is triggered when the unemployment rate spikes, with its three-month moving average jumping half a percentage point above its 12-month trough. A 4.2% unemployment rate in the July jobs report, scheduled to be released August 2, would do the trick. Would that mean a U.S. recession had started? Very doubtful, said Adam Schickling, a Vanguard senior economist who studies the labor market.

Official data suggest slowing momentum in the labor market, with the unemployment rate rising to a 30-month high and a key job-creation measure at a three-year low. A slowdown would be expected given the high interest rates that the Federal Reserve has deployed to fight inflation. However, the recent data come with caveats, and still-strong wage growth underscores our belief that Fed rate cuts aren’t imminent.

The Fed likely won’t cut rates until core inflation hits 2.5%, which we don’t anticipate happening until 2025.