Gradual rise in U.S. unemployment rate signals potential recession risk

Investing.com -- Recent research published by the Federal Reserve Bank of San Francisco on Monday indicates potential recession risk due to less-closely followed labor market indicators. The U.S. unemployment rate has seen a slow yet steady increase in recent years, which may be a sign of hidden weakness in a labor market that is now facing pressure from the Trump administration’s substantial tariffs. These tariffs have introduced the dual risks of higher inflation and increased unemployment.

Historically, before many recessions, unemployed individuals often took longer to find work and spent more time unemployed. This pattern has been observed again, according to the authors of the regional Fed bank’s latest Economic Letter. They noted, "In the past, such patterns frequently occurred during the onset of recessions, suggesting that these developments could be signs of rising recession risk."

Despite the slow rise in the unemployment rate, from 3.5% in the second quarter of 2023 to 4.2% last month, many Federal Reserve policymakers have regarded the current unemployment rate as an indication of labor market strength. However, the proportion of unemployed individuals securing jobs each month has been decreasing since mid-2023, a trend that has preceded many past recessions.

In addition, the median duration of unemployment has increased from roughly 8 weeks to over 10 weeks since mid-2022. This is comparable to the peak of 10 weeks during the 2007-2009 financial crisis. The authors of the Economic Letter noted, "Although the size of the recent increase in unemployment remains relatively small compared with past onsets, the recent data trends warrant close monitoring for potential signs of rising recession risk."

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.