Lots More With Claudia Sahm on What the Sahm Rule Is Saying Now

Episode Summary

Executive Summary: The episode centers on economist Claudia Sahm explaining why her recession indicator, the Sahm Rule, has technically triggered while the U.S. economy still may not be in a recession. She argues the signal should be taken seriously as evidence of labor-market weakening, but that unusual post-pandemic labor-supply shifts and other strong macro data complicate interpretation. The practical takeaway is that the Fed should ease policy rather than wait for clear recession confirmation.

Main Topics: How the Sahm Rule works and why it triggered (Priority: 5/5): Claudia Sahm explains that the official calculation crossed the threshold in July, based on the three-month moving average unemployment rate versus its prior 12-month low. The rule was designed as an early, simple trigger for recession relief. Why this cycle may differ from past recession signals (Priority: 5/5): Sahm argues the post-pandemic labor market has been distorted by unusual supply shocks, including labor-force exits and immigration swings, which make the historical pattern less reliable than usual. Weak labor demand is still real (Priority: 4/5): Even if layoffs remain low, the slowdown in hiring and the rise in unemployment indicate weakening labor demand. Sahm says focusing only on layoffs misses how recessions typically develop. Labor supply is masking some of the unemployment increase (Priority: 4/5): Some of the rise in unemployment appears to come from more workers entering the labor force rather than only job losses, which can make the labor-market picture look worse or better depending on the angle. Policy implications for the Federal Reserve (Priority: 5/5): The discussion shifts from fiscal to monetary policy: with no political appetite for stimulus checks, the Fed is seen as the main actor and should take its foot off the brake, likely via rate cuts. Politics and the misuse of recession language (Priority: 3/5): Sahm says recession debates are highly politicized in an election year, but she avoids engaging partisan interpretations and insists the rule is a policy tool, not a political statement. Limits of indicators and the need for broader context (Priority: 3/5): The guests discuss how no single measure, including jobless claims or vacancies, fully captures the moment; broader economic data like output and consumer spending still matter.

Key Arguments: The Sahm Rule has technically triggered, but the signal is near the edge and small methodological differences can change the exact result. The rule is not a forecast; historically it triggers after a recession has already begun, to prompt policy response. This time may be unusual because pandemic-era supply shocks and labor-force distortions are not well represented in the historical record. Low layoffs do not rule out recession-like weakness because early recessions often show up first as slower hiring and rising unemployment. A rising unemployment rate can reflect both bad labor-demand deterioration and labor-supply growth; the current cycle includes both. The Fed should respond to weakening labor-market conditions even if the economy is not officially in recession, because higher rates are part of the reason unemployment is drifting up. Politicized arguments about timing and elections do not change the underlying economic signal. Broader macro indicators suggest the U.S. economy is not contracting, so a recession call for July 2024 is not persuasive even if the labor signal is concerning.

Data Points: Sahm Rule July reading: 0.53 - Claudia Sahm says her calculation for July was above the 0.5 threshold. Sahm Rule threshold: 0.5 percentage points - The trigger is when the three-month average unemployment rate rises at least 0.5 points above the 12-month low. Podcast episode length referenced in ad: 5 minutes or less - Bloomberg’s Stock Movers and News Now ads describe short audio reports. Post-World War II historical pattern: Every time the rule triggered, a recession followed soon after - Sahm describes the empirical basis of the rule. Unemployment rate peak in Great Recession cycle: 10% - Joe notes the unemployment rate peaked in October 2009 after the recession had technically ended. Recent hiring rate: Back to 2014 levels - Sahm cites hiring-rate weakness as evidence of labor-market slowing. Recent unemployment rate low during recovery: 3.4% - Sahm references the post-pandemic labor shortage period when unemployment was very low. Labor force change early in pandemic: Millions of people left work - Sahm says the labor force plunged at the start of the pandemic.

Pivotal Quotes: "It has. The way that I calculated the Sahm Rule. And it was very close to the trigger." — Claudia Sahm: She confirms that the rule has officially triggered, while emphasizing how narrow the margin was. "It’s not a forecast. It typically has triggered about three months in to recessions historically." — Claudia Sahm: She explains the rule’s purpose and why it should not be treated as an advance prediction. "At this point, they can just take their foot off the brake a little bit." — Claudia Sahm: She argues the Fed should ease monetary policy to prevent further labor-market weakening.

Implications: Listeners should view the Sahm Rule as a serious warning about weakening labor demand, but not definitive proof of recession. For policymakers, the takeaway is to ease policy cautiously and monitor labor-supply distortions alongside traditional recession indicators.