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

it up. But it's what it basically states is that when the three month moving average of the unemployment rate is zero point five percent above the twelve month low, then historically in post World War two recessions, every single time that has happened, every time it's written above gotten above half of a percent, a recession came soon thereafter. Is that correct?

those are the changes. And but it all is I think like the formula, the thresholds very much go back to the purpose of it, which was to create an indicator, a simple one to initiate fiscal relief. Right, so like stimulus checks extra jobless payments. So it need to be something simple, and it needed to happen in the recession. So like the recession is already here. The song rule is not a forecast. It typically has triggered about three months in to recessions historically, and it's not meant to

get ahead of it. It was meant to like it's here, the unpoint rate has started to rise. We know in recessions it continues to rise. A half a percentage point increase down point rate is not a big deal. This is not a worrisome feature in and of itself. It's where it tends to go from there that makes the recessions damaging.

than the prior twelve months flows. Because it's set in stone, it also cannot take into account I guess, differences in the current economic environment or maybe nuances that are not necessarily captured by those hard numbers.

several different recessions, different kinds of features. And yet there have been and this is a theme of this entire cycle since the pandemic began, some very unusual disruptions that the pandemic kicked off, and this rule is now in a long list of our kind of macroeconomic tools that have fallen victim to features particularly supply very abrupt supply shocks that just aren't they aren't there to the same

extent in the historical record. So you like, that's where the pattern, it relies on a pattern and the dynamic that's really powerful. It's happened for post World War two period, and yet it is not infallible. And had an opportunity to talk about this for I found posts from two years ago explaining why this sum rule might break and certainly like this is where it's been headed. But that's instructive too about what's actually going on right now in

the economy. And it is not to say that all is good with the labor market, even if the SAM rule says it's a recession and we do not have a recession. Right, there is information here about the health of the labor market, some concerning signs in the labor market. Right.

isn't really driven by layoffs. It's about the fact that there's a lot of entrance into the labor force and the hiring rate has slowed down, et cetera. I guess what I would start is what is from your perspective. Okay, the rule is triggered. What is the case for sort of quibbling or people trying to explain away or oh, the headline unemployment isn't quite that bad this time, and oh layoffs are still pretty low. That strikes me as a sort of risky line of dialogue. But I'm curious your take.

it's new once there's not a simple message. I push back pretty strongly on the idea of, oh, well we haven't seen the layoffs. If you look and some of this is like the these measures, like these things where you're looking at these small changes unemployment rate. These are features early in recessions. Right, recessions do have a they turn on right, it is actually the economy charge to contract.

It's a subjective decision of the National Peer of Economic Research experts on when we go into a recession and we come out, but there is a the economy starts to contract, and the early phases of a recession, like the early six months save a recession often twenty twenty was an exception, but often are a slow grind into it. Right. You can see the signs of the contraction, but the unemployment rate often usually peaks gets to its highest level

after the economy has come out of the recession. Right, So those layoffs, if you wait to see mass layoffs, you are typically well in to a recession. Right Again, COVID came just out of nowhere and so rapidly that if our mind is set on what COVID, doesn't even look like a recession like it just because of it just looks like a shock to our system, which it was so this whole like, oh, we don't see it

in the layoffs. I don't buy that. I worry. One of the things that even when I push back on my own rule and saying it's not it's overstating the weakness is one feature. I mean, we've seen right now that the firing rate is still very low. Right, so from like the job opening, labor turnover survey, we're still very low levels. The hiring rate has come down, have been very high class come down, and it's now at levels that are like twenty fourteen levels, which wasn't a

particularly good labor market. So you do have businesses who really got burned from mass layoffs under COVID labor shortages trying to hire back all of this difficulty. Now they're holding onto workers. So what does that tell us? Employers to some extent have likely changed the way, like that pattern of how they adjust to their demand for workers. Right, you can do it through and often hiring will show up much sooner in terms of it weakening. So I

it's the firing rate being very low right now. It doesn't give you much cover because the firing rate tends to go up as the recession proceeds. Like in no way, shape or form, am I arguing the recession started six nine months ago, right, that's not relevant comparison. And then I think we have some evidence that that margin of holding onto workers versus hiring workers may have shifted some from the pandemic. So it's kind of like you get it.

It has to go all ways, right, if you have a pattern, if COVID has really disrupted a pattern in the labor market that works in favor of saying, oh, well, it's actually not as bad this time as it would normally. Look, well, you've got to be careful. There aren't stories that unwind it just the other way. Joe.

But I just looked pulled up the hiring chart, the hiring rate, it's you know, back in twenty fourteen levels, Like, why shouldn't we take the signal that your rule says, quite seriously.

fighting inflation. It should not be a real surprise that the unemployment rate is drifting up, right in that sense, So there's that aspect of we can chuck the sam rule if you'll want to, But it's like, keep an eye on the unemployment rate and what it's doing and why, what's going on underneath it? And the piece that right now is this puzzle and this is the thing that the sambrale was too simple, too simplistic in trying to

get at, is that separating out changes in unemployment. So unemployment rate rising because there's a weakening demand for labor, and that can show up in a lot of ways. Doesn't just have to be layoffs, can also be lack of hiring. Right, So anything that's weakening demand of labor that pushes up the unemployment rate and that can be very pernicious because a worker without a paycheck or a smaller paycheck buys less, right, and then that business needs

for your work. So that's the dynamic we're trying to shut off. Okay, so that's a bad dynamic. That's clear, it's in there. And yet what's also in there this time is you have shifts in the supply of workers. So labor supply and the same rule works. It looks like the changes in the unemployment rate, which you have to do with the history, because we have gone into recessions at all different levels of unemployment. Like a low level of employment does not protect you from a recession, right,

It's about these dynamics. So when there are two things have happened with the SAMER and there are other indicators I think that are out there kind of labor market that are struggling with the same issue is that early in the pandemic we had a plunge in the labor force. Millions of people just walk away from work. Okay, some of them came back, but many didn't, you know, or retirements or other just we lost And you'll see a lot of times in beginning recessions there's a decline in

the labor force. Right, there are patterns of labor supply back in history around recessions, and yet this like is huge. And what then happened is when customers came back quickly, some of those workers did not come back or came back much more slowly, and we had labor shortages the

unemployment rate early in the recovery. When you get to the depths of like three point four percent unemployment rate and you're in a labor shortage, one of the reasons that unemployment rate is so low is because you have too few workers. Right, it's pushed like labor supplies pushing it down. So we've got like starting points that are probably pushed down because we've been missing workers. And then we get to a place that you know, we've seen

in the last few years those labor shortages. Amazingly, the labor shortages were addressed with more workers, not fewer customers, which is like the thing the FED can get us

fewer customers, but it got more workers. And there's a portion particularly this very big abrupt change was in immigration into the United States, and that's actually made it hard in our measurement, even like it's very hard for me to with any conviction to quantify exactly how much of this labor supply affect because it's not just that there's increasing labor supply. We've had recessions. Nineteen seventies had increases in labor force, we had entrance into the labor market contributing,

as you know, the saw will triggered. But what we've had this time are just these big swings in one direction the other direction, and so then when that piece is in there, you get now we have what looks like some of the increase in the unemployment rate is coming from more labor supply over the intrum. I mean, it's higher unemployment is always bad for the unemployed person,

right like they're looking for a job. But when we look at that unemployment highnemployment and think about where it's headed, if it's coming primary from labor supply, and it's and especially an abrupt then it's more of a matching, like we need the jobs to catch up now, and as they catch up, well, then the unemployment rate will drift

down or at least settled out right. And then once you're getting workers, when you get more workers into the economy, it's the exact opposite of a recession dynamic, it's an expansion dynamic. Because you've got more workers, you can make more, so you have like totally opposite. You know, is this increasing unemployment rate a really bad sign? Is this increased

unemployment rate a really good sign? Unfortunately? I think the best we can do right now is to say that these two things are both in play and to watch them carefully. And that's where I think taking seriously the weakening part of the labor market, because there are policy levers to pull with the Federal Reserve can get those under control and then help that kind of catch up process of jobs. Like the stronger the job market is, the faster we can bring in these workers.

that if it cuts in September before an election. That's because it's trying to support the Democrats and support Kamala Harris. And you've been kind of on the receiving end of some of that commentary. What do you say to people who think this is all about politics and justifying downwards momentum in the labor market at a very politically sensitive time.

You know, there had been as an example, people had looked at these state level changes in unemployment rates, so like kind of state sam rules, and I've written about this also, like there were some states like California that've had larger increase in unemployment rate, and there were quite a few that had hit the half a percentage point. There is no state samrule, but you know, using that trigger.

And I started, and this was several months ago, like in the spring, writing about this, and I got a lot of pushback from some people that I wasn't being true to my rule because there was a Democrat in the White House and I wasn't willing to say a recession. And you know, for all this, it's like I wouldn't wish a recession on anyone, Like I don't care who's in the White House, but it is an election year and I'm not that naive, and I understand that people.

And recession is a very charged I mean, it's a very bad experience, and it also has meaning beyond its actual definition. So I'm not surprised it's unfortunate, and I certainly I mean the thing with looking at these these I mean it's called a rule them because it's a policy prescription. Right, It's not a rule we must have a recession. It's supposed to be a prescription of policy.

And this is not creating panic or a concern where I think if you look broadly at the economic conditions, output, consumer spending, income, like the US economy is not contracting and even after we go through revisions. I think it's going to be hard to say July twenty twenty four was a recession. I just don't see that.

demand for labor. And so regardless of the recession question or not in the specific trigger, in what it says that from a sort of policy and risk management move, it's a good time for the FED to essentially go in the other direction or essentially engage in stimulative policy one running it one way or another.

what do you think is going to happen? The direction here is really clear, and what I have a very hard time of without appealing to the FED reducing interest rates. I think it's a hard story to tell as to what it is that levels it out?

direction is a problem. That's the piece I think has to have a focus in policy maker's mind. But then there is an I this a very useful discussion about how much of that direction, that'd say, the increase in unemployment, right, how much of that is coming from these good factors and from these more problematic ones.

WORL didn't work, right, there's something better out there. So it is I think it is really helpful to look at the other indicators at this point, because the labor market has these features, right like when we're talking about this problem of like there's this labor supply and it's masking what we typically look at as the labor demand

that's with a cycle. I just I don't think at this point we're going to get a clear signal just from the labor market claims has some issues, vacancies have issues in similar ways.