Nowcasting and bathtub approach to US unemployment

The unemployment rate is on the rise and has caught the attention of the Federal Reserve and financial markets. We expect it to rise further, but this should not be a trigger for broader worries about the health of the economy. Recent rises in unemployment have primarily reflected increases in labor supply rather than firings.

What you will learn:

• To help gauge the near-term path for the unemployment rate, we created a nowcasting estimate and a flow-consistent unemployment rate. These point toward a slightly higher unemployment rate over the next several months than previously thought, warranting a slight change to our baseline forecast in July. The forecast now is for the unemployment rate to peak at 4.2% in the next several months, but risks are weighted toward a higher joblessness rate.
• The flow-consistent unemployment rate is an important concept as it represents the rate of unemployment that would hold if flows in and out of unemployment remained at current levels. Over time, the actual unemployment rate will converge to this rate implied by labor force flows.
• Our modeling uses the flow-consistent unemployment rate to predict future changes in the actual unemployment rate, suggesting the jobless rate will rise from 4% to 4.14% by year-end and 4.21% by mid-2025 on a three-month moving average basis. This is not enough to trigger the Sahm rule. We are sceptical of the message from the Sahm rule this cycle and the composition and reason for the rise in the unemployment rate matters more than an arbitrary rule.