Recession Dead Ahead? | Claudia Sahm

Now that the Sahm Rule has been triggered, what does its developer think?

There's a widely-tracked indicator known as the Sahm Rule, which purports to provide an "early warning notice" when the economy starts entering into recession.

And it just got triggered on Friday.

Does that mean a recession has started?

And what will that mean for the economy?

To find out, we have the privilege of speaking to its developer, economist Claudia Sahm. In addition to founding Sahm Consulting, Claudia spent many years working at the Federal Reserve as well as serving on the Council of Economic Advisors to the White House during the Obama administration.

As fate would have it, this interview with Claudia was recorded just a few days before Friday’s triggering of the Sahm Rule — which obviously made this discussion even more important.

To hear it, click here or on the video below:

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Adam’s Notes: Claudia Sahm (recorded 7.30.24)

EXECUTIVE SUMMARY

• Claudia highlighted that despite the significant disruptions caused by the pandemic and the war in Ukraine, the U.S. economy has shown remarkable recovery. This recovery is marked by low inflation, low unemployment, and consistent growth. However, the economy is still experiencing ongoing disruptions and uncertainty due to past events, making it difficult to predict future trends accurately.

• The Sahm Rule was developed to provide an early warning for recessions based on a half-percentage point (i.e., 50 basis points) increase in the unemployment rate over its lowest point in the past 12 months. Currently, the Sahm Rule has not been triggered, but the unemployment rate has increased by 0.4 percentage points (at the time of this recording — it triggered a few days later), indicating a potential risk of recession.

• The reliability of current economic data, particularly jobs data, is questionable due to the massive disruptions from COVID-19 and changes in data collection methods. Claudia emphasized the importance of not overreacting to high-frequency data and focusing on broader trends and averages to gain a clearer picture of the economic situation.

• There has been an increase in layoffs, but not to the extent typically seen before a recession. The share of new entrants to the labor force remains high, largely due to immigration. Furthermore, the hiring rate has decreased to early recovery levels, while the firing rate remains low, indicating cautious behavior from employers who are reluctant to let go of workers despite economic uncertainties.

• Claudia believes the Federal Reserve should begin to normalize monetary policy by easing interest rates to avoid putting undue pressure on the economy. The current Federal funds rate is significantly higher than pre-pandemic levels, suggesting room for easing without immediate urgency. Normalizing policy would help stabilize the economy and support continued growth.

• She supports the idea of having fiscal policies, such as automatic stimulus checks, in place to respond quickly to recessions. However, she recognizes the complexity and potential for inflationary pressures that such policies might introduce. Learning from the COVID-19 fiscal response is crucial to developing better-prepared strategies for future economic crises.

• Claudia’s baseline does not