Investors don't love recessions. Bad things happen when the economy contracts. Top line corporate growth stops, revenue and earnings fall. That sends stock prices lower. Ever since the pandemic ended, lots of investors fearing a recession was imminent have gotten scared out of equity markets that any day now recession still hasn't shown up. This is despite the prediction of many well known economists over the past two years, there still
has been no recession. As it turns out, there are ways investors can tell if an economic contraction is really coming. I'm Barry Results and on today's edition of At the Money, we're going to discuss how to accurately identify in advance, in real time when the economy is going into recession. To help us unpack all of this and what it means for your portfolio, let's bring in Claudia Sam. She is a former Federal Reserve economist and creator of what
has become known as the Sam Rule. Claudia, welcome to Bloomberg's At the Money.
Happy to be here.
So let's start with the basics. Tell us what happens to the economy during a recession.
A recession is a broad based contraction and economic activity. So it's not about one industry, it's not about one part of the country. It hits all of us, and a recession hits hard. It's and that's why we want to fight them. That's why we want to know if they're coming.
So that obviously is not great. How long and deep are the typical recessions.
It varies. It depends on what happened.
The global financial crisis in two thousand and eight, that was a big, fast de recession that was very bad. Two thousand and one, the bursting of the dot com bubble, that's one of the mildest recessions that we've seen in a very long time. So it depends on what hits us as to how hard we go down.
Really interesting, it's funny you mentioned one because the year before and the year after two thousand and two thousand and two was one of those rare years where the stock market was down even though there wasn't a recession. Surprisingly, that was a fairly mild recession. Where did the two thousand and one recession show up in the data?
In two thousand and one, we saw the unemployment rate rise, not as much as in two thousand and eight or in twenty twenty, and we did see GDP decline, though it was not as severe as we've seen in other recessions.
So you developed an indicator what people call the Soalm rule, to help us figure out in advance when recessions are coming tell us about it.
UM looks for relatively small increases in the unemployment rate to say we're in a recession. Specifically, we look at the unemployment rate, the national unemployment rate, take the three month average. We don't want to get faked out by the bumps and wiggles. We compare the most recent reading to the lowest of these three month averages over the prior twelve months. If that difference is a half a percentage point or more, we are in a recession.
So let me get a little more specific. How timely is this indicator when it goes offen what's its track record been like.
It has a perfect track record since nineteen seventies. It's never triggered outside of a recession, and it's always triggered early in one, far earlier than we would have the official recession dating by the National Beer of Economic Research, and it's within the first three four months of a recession.
And that also is before we would have the.
Two quarters of GDP that would typically be used to say we're in a recession.
Although we've seen two negative quotas of GDP where we haven't had recessions. That's not an official indicator anywhere.
It just seems to.
Be a rule of thumb that some countries use, but we don't really use that here in the United States. Right, we have the NBER and all of their many indicators that they track.
What's amazing, and so many relationships have broken in this COVID and the recovery that two quarters of a decline in GDP that always happens in a recession.
You've got to go back to nineteen.
Forty seven to find a time where you have two quarters outside of a recession. So that just shows one should be really careful right now with the rules of thumb that have worked in the past.
Right, you can find a good parallel between the post war era and the post pandemic era, giant fiscal stimulus, et cetera. But let's stick with the some rule for a moment. Most economic rules that I'm familiar with, they're pretty complex. They rely on a lot of moving parts. The SAM rule seems fairly simple. A single labor market indicator. Is that oversimplifying the complexity of the economy, or do all roads in the economy lead to the labor market?
This SAM rule is simple by design. Its purpose was to say, hey, Congress, send out the stimulus checks and frankly, do it automatically. Just tie it to the same rule. That's why it exists. It's been used for a lot of other purposes recently, and so but I will say, there's a saying among economists, if you had to be on a desert island and you can only have one data series to tell you what the US economy is doing, it's the unemployment rate. Is it tells us so much
for a lot of different reasons. It tells us so much about where we are, and frankly, as you see it start to drift up, it can tell us where we're headed. It's not a perfect signal, but it is something to say, Yeah, it's even before the summ will with trigger you should pay attention to it.
So let's talk a little bit about that. You know, since since the pandemic ended, it seems almost immediately after the recovery began, we began hearing about a recession. This is already going on for two years. It's imminent, it's about to happen. And as that drum beat has gotten louder, inflation has gone down, Unemployment has fallen, consumer spending has remained robust, even wage gains have gotten better. If anything,
the economy has improved. Why this constant drumbeat that a recession is imminent.
Many economists, many of my peers, got stuck in the nineteen seventies, and in the we've had inflation went up, I mean legitimately in twenty twenty one, that was the first time in a long time we'd seen.
Inflation about it spiked, it went up fast.
The wisdom if you knew nothing else and just saw inflation going up, typically you'd say, oh, okay, the federal reserves got to step in.
They got to raise interest rates.
And in the past, when the Fed has done that, it ends up in a bad place, right Like, it's hard to do that. What I had, the point I had made the entire time, was that most of that inflation was coming from disruptions from COVID. And as we went into twenty twenty two. There were also disruptions from Putin invading Ukraine. That's not demand, that's not what interest rates solve. J Powell did not unload the docks in la he didn't take a second job, he didn't give
the vaccine out. These are all things that needed to happen to get inflation down.
It has been so slow to get back on track.
And yet twenty twenty three, which we were told was impossible, massive declines in inflation, unemployment at its lowest in you know, since the nineteen sixties. That shouldn't have happened, and yet it made perfect sense if you thought about, Hey, there was a pandemic.
Hey there was a war in Europe.
So that's what has worked out, and that's what puts us on a path to the elusive soft landing.
So, to paraphrase James Carvill, it's the pandemic stupid. Huh. So what other periods are there in history that are kind of comparable to what we've experienced over the past year or two where there are all these recession warnings and yet no recession.
Recessions aren't supposed to be forecastable, So for two years to have recession calls so loud has been a little mind blowing, right, Like, we're not supposed to know when these are coming, and we're certainly not supposed to be so certain about it. You'd have to go it's like outside of living memory to find episodes of inflation, like what we're seeing after the two World Wars, after the pandemic.
I mean, these are places we don't have very good data in terms, and we obviously don't have experience with them. So to gravitate back to the nineteen seventies, the vulgar fed, you know, the early eighties, it makes sense why that's where people go, because that's where we have data, that's where we studied.
But like that's not what This.
Is very different world in the seventies and today. So you mentioned we don't have a giant data set. What if we had seventeen recessions in the past century and change. Given that we can't be generally confident about recession forecasts, how confident should we be in the sam rule You actually had discussed, Hey, maybe it's not going to be right this time.
Absolutely, if the sawmo we're going to break, it would be this time and break in the sense that we could hit that half a percentage point trigger, and then the unemployment rate doesn't really rise that much more. We
don't go into recession. Typically after the sawwar triggers, you have almost a four percentage point increase in unemployment relative to the low two thousand and one that was the smallest, and it was even still two percentage points, so it would be very not usual for you to get up to four percent, which we kind of have to hang around four percent for a while to have it trigger and then just kind of hang there and maybe come back down later. There's a very good case for why
this could happen. It goes back to these disruptions of COVID. We know it's taken the labor market time to heal too. We had all these labor shortages. We need to bring people back in. Millions of people walked away from jobs because of caregiving because they didn't want to die, and we stopped processing immigrant work visas. So these things are happening.
There's this kind of catch up now. Now it's like there's more people and the jobs have to catch up, versus in the labor shortage it was the other way around. That just can make things really messy, and again if the summer we're ever going to break, it's this time. And frankly, we have seen relationships breaking left and right, so I would in good company.
So let's talk about the things that have broken in the post pandemic era. We've seen shortages of single family homes, we've seen shortages of semiconductors. Is still a long way to get a new automobile, and it appears that we're still dealing with a labor shortage. How many more workers does this country need to reduce some of the tightness in the labor market.
We started to make a good bit of progress in the second half of last year in terms of getting workers back and in some cases even better than before. Women's prime age employment is at record highs, the percent of workers with disabilities who have jobs record high, and even some very marginalized groups, like black men, their labor force participation has looked great. The black unemployment rate has
been low. We need these groups to come in not just to make up the whole that the pandemic created, but to keep it going. In terms of the labor market is really strong right now, and that's a good thing, and it's one that we need to build on. Because, as you said, like, there's still a need for talent and productivity, and that was the big kind of under the hood story of last year.
So I want to leave investors with a little bit of advice from the creator of the some rule. Tell people what they should be looking for if they really want to have the best way of anticipating a potential recession.
Keep your eyes on the labor market. The labor market is so essential to American consumers. Like your paycheck, that's what you spend. So if we lose the labor market, we lose consumers. If we lose consumers, we're done.
And that's how we get a recession and typically a week stock market. So to wrap up, investors who are concerned about all these recession calls we've been hearing about for the past two years should just ignore them. And if you really want to know when a recession is coming, keep your eye on the unemployment rate. When the three month moving average ticks up zero point five to zero of a percentage point relative to its previous twelve month low,
that's a warning sign. Get ready for a possible recession. I'm Barry Ritolts and this is Bloomberg's at the month.
Oh, you got your things today.