Why might this time be different?

With the unemployment rate up, concerns about a recession are up, too. The Sahm rule, my recession indicator, is getting attention and giving me opportunities to discuss recession risks.

Nov 12, 2023

Apologies for no post last week. It turned out to be the ‘Sahm rule Roadshow.’ Today, I share some of the highlights. I will be back to regular programming soon; the economy, too!

Why My Recession Rule Could Go Wrong This Time.

But again, a recession is not inevitable. Indicators of economic downturns like the Sahm rule are empirical regularities from the past, not laws of nature. The pandemic was extremely disruptive, and the rebalancing of the economy has been messy and slow. That’s as true for inflation and supply chains as it is for the labor market.
After more than two years of severe labor shortages, workers are still coming back at a somewhat faster pace than new jobs being created. The labor force participation of prime-age women is at an all-time high after an outsized decline in 2020 in what was dubbed a “she-cession.” Workers with disabilities and Black men made historic gains this year, too. After a stoppage during the pandemic, immigrants on work visas are entering the country. Taken together, economist Julia Coronado, the president and founder of MacroPolicy Perspectives, argues that the rising supply of workers is good for the rebalancing of the labor market, even if it shows up initially in somewhat higher unemployment rates.
If that’s the case, recession indicators based on the unemployment rate, like the Sahm rule, may not be as accurate this time. On the path back to normal, unemployment may move above 4% for some time, which would trigger the rule but not a recession as jobs catch up to supply. The Sahm rule would not be the first recession indicator to “break” in this cycle. Last year, real gross domestic product declined for two consecutive quarters without the National Bureau of Economic Research declaring a recession — something that hadn’t occurred in the US since 1947. The declines were driven by a sharp drop in net exports and large swings in inventories – both of which are consistent with resolving disruptions in global supply chains.

Bloomberg Opinion unlocked my piece, so it is free for the public. Link. Do read. It has the Sahm rule in my own words. ‘This time could be different’ is a risky argument. But look around; this time has been different since the pandemic began.

The pandemic was extremely disruptive both to the US economy and the global economy, and it caused the typical relationships that we would have looked at to make the judgment of whether we are in a strong place or if we are going into a weak place to not work so well.
As someone who is viewed as an expert on recessions, it has been a wild ride. It ebbs and flows how much people think we’re headed into one and how many people think we need one. What I do know is that the US economy is leaving 2023 in a better place than when it came into it, and a better place than the vast majority of commentators thought it would be in.
What I do know is that the US economy is leaving 2023 in a better place
On balance, inflation is still higher than we had expected, but for almost two years running we’ve had unemployment below 4 per cent, [strong] inflation-adjusted GDP growth and real consumer spending, too. So if you take it all together, that’s really good. And the thing that happened this year that wasn’t supposed to happen was inflation came down markedly and unemployment stayed low.
That opens up a conversation of whether we need to have a recession. I have said the whole time that we do not need a recession, but we may get one.

That’s me in a Financial Times long interview with Colby Smith. Link.

It’s part of the Economists Exchange—an interview series with economists.

The 'R' word: Why this time might be an exception to a key recession rule.

Ayesha Rascoe: Are we in a recession?
Me: We are not in a recession. That goes far beyond the Sahm rule, the indicator I have by the unemployment rate. A recession is a broad-based contraction in economic activity. You need to see consumer spending fall off and income and production. And if you look across the U.S. economy, we are not in a broad-based contraction.
Ayesha Rascoe: Are there measures in the economy that are concerning to you right now?
Me: You look at delinquencies. People who have fallen behind on paying their credit cards, paying their auto loans … The delinquency rates have started rising [after falling in recession]. You see them now in a place about where they were before the pandemic. Now, do they keep rising, or do they level out?
We have a lot of measures like that. This could all turn out well. And there’s a story to be told about how it could—a story based on data. And yet, that’s not history.

Among my interviews, this one on NPR Weekend Edition Sunday (7-minute listen) is the most accessible. Link.

Signs of a recession may be on the horizon.

Steve Liesman: Is the Sahm rule a causative relationship?
Me: There is a logic to it that is important and not novel to the Sahm rule. Once the unemployment rate starts rising, it often keeps going, and it picks up steam. It’s a feedback loop. Workers get laid off, then they go out and spend less and then other workers get laid off because there aren’t the customers, and so and so forth.

CNBC The Exchange. I love that Kelly Evans opened the segment with a discussion of automatic stabilizers, which is the reason I created the Sahm rule.

Also, I love the tweet that they pulled into the interview. Yield curve shade.

Directly before my interview was one with Mary Daly, President of the San Francisco Fed; expect to see my reactions in the coming post on the Fed.

Guys, I know how to calculate the Sahm rule.

Tracy Alloway: Do you get tired of having to convince people that you do in fact, know how the Sahm rule actually works? The rule that’s named after you.
Me: Yeah. Men are fascinating. It’s interesting … The people who try to explain to me that I have calculated it wrong and then get really not happy with me when I don’t agree with them …

Lots More (casual version of Odd Lots) podcast. Link. Bloomberg subscriber-only.

Most of the conversation is about the Sahm rule and the economy. Still, in addition to this opener, there is an exchange with Tracy at the end about the challenges of being a woman in macro/finance in public.

In closing.

I am incredibly grateful for the opportunity to share my expertise on recessions with various audiences. Our usual rules of thumb about the economy, including the Sahm rule, might not be as reliable this time.

That can be frustrating. As much as we want certainty now, it does not exist. We can bring our best tools and judgment to the task. I am just trying to do my part.