The inventor of a famed recession indicator says many state-level warning signs are less dire when you factor in immigration

• A recession indicator known as the Sahm Rule has triggered in 20 states. But Sahm herself says the situation is less dire when you factor in immigration.
• Immigrants have had an impact on the labor market that isn't being fully factored into a rising unemployment rate, she said.
• "The increase in unemployment rates stem partly from the strength of the economy the past few years," Sahm wrote.

A historically accurate recession indicator is flashing across the country, but immigration trends leave no reason to worry, Claudia Sahm, the signal's founder, wrote in Bloomberg.

The so-called Sahm Rule has flashed red in 20 states, she says, and would indicate a recession has arrived. It triggers when the unemployment rate's three-month average climbs 50 points above a 12-month low. 

But while rising rates paint a grim picture, it's actually evidence of a winning economy, as each state's rapidly expanding jobs market pulls in new immigrant labor.

"Although this may appear dire, the increase in unemployment rates stem partly from the strength of the economy the past few years, strength that has attracted much needed immigration to meet the demands of a hot labor market," Sahm wrote.

Last year, net immigration into the US hit 3.3 million, according to Congressional Budget Office data cited by Sahm. That's a sharp rise from the 900,000 average that spanned between 2010 and 2019. 

While immigrants boost the population, they don't immediately take up jobs, boosting unemployment. That's as the immigration process often holds up their ability to legally work, Sahm explained. 

"More generally, an increase in the labor force has been long understood to be a 'good' reason for why the unemployment rate temporarily rises as new workers find jobs," she wrote.

California, New York, and New Jersey, are the three states with the highest share of immigrants in their population: each has seen some of the leading unemployment spikes in the nation.

According to Sahm, the burst of immigrant labor is good news in itself. During the economy's post-pandemic reopening in 2021, these workers were critical in easing a national labor shortage, ensuring that the economy could run at its pace. 

"In 2022, the foreign-born labor force was 1.4 million larger than before the pandemic and 2.7 million larger in 2023, far exceeding the sluggish recovery in the US-born labor force,"

JPMorgan has also noted immigrants positive impact on labor, and last week predicted that this population should keep US output up.