A widely followed recession signal just flashed, but its inventor says a downturn isn't guaranteed

• The July jobs report triggered the Sahm rule, but its creator said the US isn't in a recession.
• However, she is worried about unemployment and high interest rates.
• Economists like Sahm think the Federal Reserve waited too long to cut interest rates.

A recession indicator with a near-perfect record is flashing — but its creator told Business Insider this could be one of the rare times it's wrong.

"The US economy is still growing," said Claudia Sahm, the chief economist at New Century Advisors, a former Federal Reserve economist, and the creator of the Sahm rule. "We are still adding jobs. We are spending even after inflation."

The Sahm rule says that the US is in a recession when the difference between the unemployment rate's three-month moving average is at least 0.50 percentage points above the previous 12-month low, again using the three-month moving average. It was triggered when the July jobs report on Friday showed unemployment had jumped to 4.3%. The US economy added just 114,000 jobs in July, falling short of Wall Street expectations.

Despite rebuking the idea that the US is in a recession, Sahm does have concerns about the labor market and high interest rates. She said data from the latest jobs report "certainly raises chances of going into a recession" if things don't get sorted out.

"The most important lever to pull is to normalize interest rates," Sahm said, joining a chorus of economists who say the Federal Reserve has waited too long to cut interest rates. The Fed decided to hold interest rates steady in its July meeting at the end of the month. Market traders still expect cuts in September, although some have called for an emergency rate cut as early as this week.

Some, including Sahm, say the Fed should've seen the signs. It's not surprising that the labor market has cooled after the booming post-pandemic recovery. Sahm said, "It was expected and probably necessary to see things get back to a more quote, unquote normal."

However, she said, the labor market is going beyond "normal" now. "We're really moving into a place where this is more weakness than we should be comfortable with," she said.

While a recession isn't happening, Sahm said, "I wouldn't want anyone to look at something like the Sahm rule and say, 'Well, it's not about risks anymore; the bad outcome is here.' I don't think that's the case."

Sahm said the labor market is working through "unusual disruptions," like people who exited the labor force during the pandemic and people coming outside the labor force looking for work, which could create a short-term period of higher unemployment.

Sahm said working through the disruptions "is very painful, and it can look bad, but the path is still there. But, it's not at all sunshine and roses, that's for sure."