What would it take to tip the U.S. economy back into recession? According to economists at Goldman Sachs, a rise of a couple tenths of a percentage point in the unemployment rate would do the trick.
Looking at the historical relationship between the labor market and broader growth, the Goldman economists found a consistent relationship: If the three-month average of the unemployment rate rises by at least 0.35 percentage point, the economy is either already in recession or will be within six months. As employment falls, the associated drop in income starts a vicious cycle of declining spending and hiring.
The rule of thumb offers reason to pay close attention when the government reports this Friday on the state of the labor market in July. The three-month average of the unrounded unemployment rate currently stands at 9.07 percent, up from a low of 8.90 percent in April. If it hits 9.3 percent in July and stays at that level in August, the rule points to a double-dip recession. The only exceptions have occurred in the earliest months of economic recoveries, but that doesn't apply to the U.S. now.
Most economists -- including those at Goldman -- aren't expecting the unemployment rate to get quite so high. The average forecast for July among economists polled by Bloomberg is for the unemployment rate to hold steady at 9.2 percent. That doesn't leave much of a comfort zone.