New Indicator Suggests 40 Percent Chance US Is in Recession

U.S. $1 banknotes are seen in front of a stock graph in this illustration taken on Feb. 8, 2021. Dado Ruvic/Reuters

A new recession indicator has been born, and it suggests a 40 percent chance the U.S. economy could be in a downturn.

Pascal Michaillat and Emmanuel Saez, economists at the University of California, recently published a paper outlining the details of the new recession signal, which adds another layer to the concept known as the Sahm rule.

Earlier this month, the financial markets suffered a three-day selloff, partially due to the July jobs report activating the widely cited concept.

Named after former Federal Reserve economist Claudia Sahm, the idea states that the United States is in a recession if the difference between the three-month moving average of unemployment and the previous 12-month low is 0.5 percent or higher.

The Sahm rule was triggered when the unemployment rate advanced to 4.3 percent last month, up from 3.5 percent. It has accurately pinpointed all but one recession since 1960.

The economists employed a comparable methodology that relies on jobless and vacancy rates.

In addition to the Sahm rule, Michaillat and Saez use the difference between the vacancy rate’s three-month moving average and the previous 12-month maximum.

“When the minimum indicator is between 0.3pp [percentage point] and 0.8pp, the recession might have started. And when the minimum indicator is above 0.8pp, the recession has started for sure,” the economists wrote in the paper.

“With July 2024 data, our indicator is at 0.5pp, so the probability that the US economy is now in recession is 40 percent. In fact, the recession may have started as early as March 2024.”

They noted that the metric “perfectly identifies all recessions since 1930.”

Sahm, who now serves as the chief economist at New Century Advisors and is the founder of Sahm Consulting, has dismissed suggestions the country is currently entrenched in a recession, referring to the changing dynamics of the labor market since the coronavirus pandemic.

“I’ve argued before it might be different this time—that is, the Sahm rule triggers with no recession,” Sahm wrote on X.

“The abrupt changes in the labor force since the pandemic, including the surge in immigration, would contribute substantially to the rise in unemployment.”

However, it doesn’t mean that the United States is not inching toward a downturn recession, she added.

“Fed Chair [Jerome] Powell said last week that the data show ‘an ongoing, gradual normalization of labor market conditions.’ The rise in the unemployment rate over the past year, which my rule reflects, now looks like we are past normal and uncomfortably close to recession,” Sahm said on the social media platform.

Still, even if the nation is not in the middle of a contracting GDP growth rate, it does help market participants “skate to where the puck is going to be,” says Vijay Marolia, the founder and CIO of Regal Point Capital.

The Federal Reserve Board Building in Washington, on June 14, 2022. Sarah Silbiger/Reuters

“The Sahm rule deserves more credit than it’s currently getting—but the smart money is very cognizant of the consequences of not paying attention,” Marolia told The Epoch Times.

“This is because it does a great job of acting as a leading indicator—this allows us to play like Wayne Gretzky and ’skate to where the puck is going to be' rather than where it’s at now.”

Marolia thinks it is important for market watchers to consider various data points, such as private companies and families struggling with inflation, debt servicing payments, and real (inflation-adjusted) wage trends.

Analysts at EPAM Insights said in a report that despite the Sahm rule’s solid track record, it is important not to jump to conclusions.

“While this indicator has a strong track record of signaling recessions before they are officially recognized, it is important not to jump to conclusions,” they wrote.

“Economic indicators can provide valuable insights, but they are not infallible.”

In the second quarter, the economy expanded at an annualized higher-than-expected pace of 2.8 percent, up from 1.4 percent in the first quarter.

The solid growth rate was fueled by a surge in consumer spending and government consumption.

Looking ahead to the July to September quarter, the Federal Reserve Bank of Atlanta’s GDPNow model estimate indicates an expansion of 2.9 percent.

The New York Fed Staff Nowcast signals growth of 2.2 percent in the third quarter.

RJ Assaly, the chief market strategist at financial market research services firm Toggle AI, says a potential recession may depend on upcoming inflation numbers, retail sales data, and retailers’ earnings.

“I think everyone’s focus at the moment is on whether we are in a recession,” Assaly told The Epoch Times in an emailed note.

“If inflation comes in lower than expected, and retail sales for Home Depot, Lowe’s, and Walmart in the following week show that consumer spending is weak, it could increase recession concerns.

“To avoid falling behind the curve, the Fed may become more aggressive, and that’s where I think markets are likely to experience much more panic.”

While experts discuss the recession question, most Americans think the country is currently in a downturn, according to recent research.

Findings from an Affirm study showed that 59 percent of respondents said the United States was presently in a recession because of above-trend inflation and the high cost of living.