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Hey, Sarah, Hi, David.
So, I've noticed that there's one name that's been coming up over and over again. It's been all over TV the last couple of weeks.
Kamala Harris, no, Donald Trump, no, Tim walltz jd Vance.
Okay, I should clarify. There's one name we've been hearing over and over on Bloomberg TV.
Claudia s. Claudia Sam so called Psalm rule.
That Psalm rule, The Psalm rule has been triggered.
Right Claudia Sam inventor of the Psalm rule Bingo. She's the chief economist at New Century Advisors and also a columnist here a Bloomberg Right, the.
Psalm rule, it's everywhere, and I know it's considered to be one of the most accurate recession predictors around. It's about jobs, right.
It is. And the Som rule states, checking my notes here, if the unemployment rate rises more than half a percentage point within a one year period, the US is in a recession.
Right, And some said the jobs data from July triggered the rule. So, David, does that mean it's happening? A recession is coming?
I'm so glad you were asking these questions, Sarah, because today we are introducing a collaboration with Bloomberg.
Explains Thank God, I need that.
Same here every now and then we're going to break down the biggest parts of the economy and our financial system.
We'll take a look at how they came to be and what they mean for all of us. I promise there's something here for everyone, even if you're already an economist.
So today, on the Big Take, we hear from Claudia Sam herself about what it means that her rule has been triggered and how some feels about all the Psalm rule mania.
Since it became popular, it's gotten used and abused, and it, you know, acually had a different name that didn't involve my name.
Wait, Claudia som wish as we didn't call it the Psalm rule, she does.
Wow. I'm Sarah Holder, I'm David Gera, and this is the Big Take from Bloomberg News with the Psalm Rule explained. In the last few months, Claudia Sam has become one of the best known economists in the world thanks to the research she's done on recessions. But Claudia says she didn't set out to become one of the leading lights of the dismal science, someone who is the namesake of a widely cited rule in economics.
So I grew up in the Midwest on hog farm. I never dreamed that I would be an economist. I didn't actually know what an economist was before I went to college.
It was on that family farm that Claudia learned a lot about work, years before she ever heard of a jobs report.
There was one summer we had to work outside all summer doing you know, nothing complicated, but really like grunt work, which essentially meant shoveling hog manure all summer. And you know, that was unpleasant. And also at the end they said, well, you know this is hard work. No matter what you do going for it. You don't look down at anybody.
Right, Claudia says she took that to heart, along with something else her mom and dad told her and her siblings.
We had this choice of well, you go do really well in school, or you're.
Going to go out and do more with automneur Claudia studied hard. She went to Dennison University, a liberal arts school in central Ohio, and it was there Claudia discovered economics. What she liked about it, she says, is it could be practical.
I see problems out there in the world and to have some tools to chip away at them. Is that that had the appeal.
After college and graduate school at the University of Michigan, Claudia got a job as an economist at the Federal Reserve in Washington. It was just a few months before bear Stearns collapsed.
My first year as a professional forecaster was two thousand and eight. It was an absolute birth by fire. Is a you know, being new to the profession, learning what I'm doing, and then just watching could fall.
Apart, banks going busts, the housing market collapsing, and a recession. Claudia says she had a big realization, one that would inspire her work on what became the Psalm Rule. She started to focus her research on what the government can and should do when there's a deep economic downturn and what kind of aid is the most effective.
Because the Fed, when it does monetary policy, works around the edges, right, they need to have a sense of what they think Congress is the effects of policies from Congress will do, and that I guess you know, that experience really radicalized me to the idea that we have to have better fiscal policy.
One of her main takeaways, Claudia says, is that aid needs to get to people faster. She recognized that the sooner it was distributed, the better the odds small businesses could stay open and that people could stay in their homes and keep their jobs.
I wanted an early warning, early stages of it's a recession. Things are going south, that momentum is there, let's and help.
Fresh out of grad school, Claudia had found what she wanted to focus on, and about a decade later, she was asked to participate in a big project put together by two think tanks.
And there were several contributors, several economists experts like myself, who had proposals of fiscal policy that could be used to fight future recessions.
Claudia's contribution was a paper on direct stimulus payments to individuals, and as she was doing the research that underpinned it, Claudia reflected on something she'd noticed during her time at the FED, going back to the global financial crisis. Her colleagues used data, but they also relied on intuition I have.
Been around and absorbed a lot from people who were making those kind of decisions, like what are the rules of some the good professional macro forecasters do like real world down in the trenches. So something that I had picked up is small increases in the unemployment rate or bad news.
Right?
Can you describe, like what your aha moment was like when you kind of recognized that there was in fact this rule. Was there a big aha moment for you?
No, there's just a very tortured Excel spreadsheet.
Claudia looked at all the economic downturns since World War Two. She dug into the jobs data, specifically focusing on the unemployment rate, and started looking for a pattern, a common set of circumstances that preceded each recession.
Basically, I took an intuition, a rule, a principle, and I sat down and said, Okay, let's let's make this as accurate as possible. Let's try different variations. There is nothing about the formula that is special. So we're looking at this change over a relatively short period of time in a year, and if that change is a half a percentage point or more, that is consistent and with the early stages of a recession in US.
Claudia found that if the unemployment rate increases by half a percentage point or more, that's a sign the US is in a recession.
If you start in nineteen seventy in the data that were published at the time, so the real time data, it has a perfect record. It gets really close in seventy six to a false positive, but as a very good record. And if you go back before that, it has a very good record. There are two you know, quote what false positives it turns on outside of recession. In the two cases that are in that in the historical record, in sixty nine and fifty nine, a recession followed within six months.
Now, remember what Claudia really cared about, what motivated her research is how government should respond to recessions the sam rule. What she discovered about how that increase in unemployment preceded pass to other downturns. That was only part of what ended up being a twenty six page paper.
So in my chapter, which was about automatic direct payments that would go out early in recessions to individuals, get them on autopilot. Congress agrees ahead of time conditions get bad, the checks go out the SAM rule was, and it wasn't. It really doesn't look like much. It's like a complete supporting actress to this plot here is that it was what tells you turn it on when to send the checks out.
A few months later, the book is published and there's a big event in DC. I get together with all the authors.
Good afternoon, welcome you on behalf of my colleagues at the Hamilton Project as we engage in today's forum preparing for the next recession policies.
So I go to the event. I mean, I was supposed to be one of the panels. I'm sending there waiting and have all these luminaries.
We're extremely lucky. Chaperanankee was head of the Federal Reserve from two thousand and six.
Christina Roma is to University of California.
Buckley was.
I'm excited about the event, and in one of the first panels, they start the SAM rule.
If a recession occurs and the Psalm rule is implemented again.
When the Psalm rule triggers, we'll be talking I think for years to come about the PSAM rule.
And I'm just like, what is happening? I was mortified. Yeah, I honored and embarrassed that this is getting called the Sam rule.
And just like that, in twenty nineteen, the Psalm rule was born, and since then.
It certainly has it's taken on a life of its own.
After the break, Claudia Sam explains why she thinks her rule has been used and abused and why she wishes it had a different name. So, just to recap, the Psalm rule came out of research economists Claudia Sam was doing and too when the government should start helping people during an economic downturn, like sending out stimulus checks. The key is Claudia wanted it to be automatic. If there were a rule and it's triggered, help would go out and recessions hopefully wouldn't be as painful.
I was trying to diagnose a situation.
But that is lost on a lot of people. And since the Psalm rule was introduced in twenty nineteen, it's become widely cited. We've heard it mentioned by FED policymakers and by lawmakers, and it's been all over the news. It's been one of Google's top trending searches. But Claudia says that is not necessarily a good thing.
It's been a little rough in a little surreal being in the middle of it. It is very simple, and anything that simple is going to have, you know, it has its Achilles heel.
An Achilles heel, Claudia says the Psalm rule has one big vulnerability. It can't account for all the different reasons there could be an increase in unemployment. Right.
So the bad reason that u employment rate goes up is there's less demand for workers, right, and so that could you know, the typical though not the only way this gets expressed, people lose their jobs. So that demand story for workers is why this sum rule works.
But Claudia notes the unemployment rate can go up because of something else.
It has some temporary pain associated with it, but actually has a much more positive story, like it's dynamos are good.
In this scenario, the unemployment rate goes up because there are more people joining the labor force. Maybe there's an uptick in immigration, which can ultimately be beneficial to the economy.
So if you have particularly if you have kind of a burst of people coming in looking for work, well, then you can have a bump up in the unemployment rate. Now, as long as the jobs catch up, that unemployment rate will come back down, right, and then you've got more workers. So now you've got an economy that's even got a better chance of expanding like it's it's the very opposite direction of the downward spiral of a recession.
And this is partly what Claudia thinks is happening right now. The unemployment rate is going up and economic activity is slowing in the US, which has triggered the Psalm rule and led to a lot of hand ringing. But Claudia says.
I think it's wrong about where we are right now. I do not think the US economy is in a recession.
She's noticed people invoking the Psalm rule for their own reasons, either to put pressure on the Federal Reserve to cut rates or to suggest that the Psalm rule is broken. But Claudia says the dynamics of the economy have changed so much since the pandemic that it's not a surprise to her that her rule might not be working in this scenario.
In the past four and a half years since the pandemic began, we have lived through a period of extreme It has just been confusing. Like the patterns, if this Psalm rule, we're ever going to break. It would be now because not only are we having changes, say in supply, we're having we had some big ones, and that just really puts stress on our typical We think about the boom and the bust and demand.
And it's not just the Psalm rule that's having problems given the uniqueness of the economy post pandemic.
So the sum rule is actually one of a whole series of our kind of tools that have you know, had a rough time. Does that mean that the tools should be ignored or thrown aside, No, it just means you should be really careful with them. And I I tried to be careful with these tools always, right, I don't. I would never just look at one rule, even I have my name on it. In trying to give advice on the economy in terms of big.
Picture, Claudia says that in the big picture, even if the US economy isn't in a recession, there are warning signs we.
Might not be in a bad place right now, but the direction is not good. So then it's like, well, you know, all is not lost. There are things to do. But I think, you know, first it's recognizing diagnosing the problem appropriately, and then figuring out what's But yeah, so my take on this Som rule is it is there is a message there. There is something that we need to be paying close attention.
To, which is part of what the Psalm rule is supposed to do. Remember, Claudia wanted it to be a diagnostic to help solve the problem of waiting too long to help people during recessions, and solving problems was what appealed to Claudia about economics in the first place.
The Sam rule was never meant to trigger and then cause panic. I just I wanted an early warning, early stages of it's a recession, things are going south, that momentum is there, let's step in end help and from the beginning, and I continue, I'm probably even more so. I'm like, there's a better rule out there, and I will be thrilled when I see the person that hasn't.
This is the big take from Bloomberg News. I'm David Gera. This episode was a collaboration with our newsroom friends called Bloomberg Explains Hard to Explain Topics explained Simply. It was produced by Andreana Tapia and Alex Sagura, who also mixed the episode. It was edited by Stacy Vanick Smith and it was fact checked by Thomas loom Our senior producers are Kim Gettleson and Naomi Shaven. Our senior editor is Elizabeth Ponso. Our executive producer is Nicole beemster Boor. Sage
Bauman is head of Podcasts. Thanks for listening, we'll be back tomorrow