Leading Indicator

The “Sahm Rule”, pictured in a graph from the St. Louis Federal Reserve above, was designed as a real-time leading indicator of recession. Here’s the description of our present situation from the American Institute of Economic Research:

In this morning’s US Bureau of Labor Statistics data release, the U-3 unemployment rate increased 4.1 percent in June 2024, rising by one-tenth of a percentage point above the forecast rate. The U-3 rate measures the percentage of the civilian labor force that is jobless, actively seeking work, and available to work, excluding discouraged workers and the underemployed.

This uptick triggers the Sahm Rule, a real-time recession indicator, suggesting that the US economy is in, or is nearing, a recession. The Sahm Rule, developed by former Fed economist Claudia Sahm, is designed to identify the start of a recession using changes in the total unemployment rate. According to the rule, a recession is underway if the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more, relative to its low during the previous 12 months. With the June 2024 U-3 rate of 4.1 percent, the average of the last three months being 4.0 and the lowest 12-month rate of 3.5 percent in July 2023, this criterion has been met.

While not going so far as to predict a recession they conclude:

While more data will be required to confirm the Sahm Rule indication, the impact of accelerating prices, interest rates at their highest levels since 2007, and commercially suppressive pandemic policies have probably caught up with US producers and consumers.

Yesterday I pointed out that the relationship between full-time and part-time shops suggested recession. Here’s another leading indicator.

I honestly don’t know what is going to happen—we’re in unknown territory. The U. S. economy has never been exposed to such a large debt overhang in peacetime, particularly with the economy as deindustrialized as it is now. The political instinct will be to spend more, especially during an election year, which would push in the opposite direction as Fed policy.

1 comment… add one
  • TastyBits Link

    You are correct. We are in unknown territory, but it is because of the two year economic shutdown. The shutdown, tariffs, government spending, QE47, QT5, etc. have caused economic distortions of most likely epic proportions. It is unlikely, but it is possible there are no distortions.

    The monetary/financial system has a large amount of headroom. The problem is that the point-of-no-return will be crossed before the collapse, and once crossed, there is no turning back.

    Most of us will be dead by that point, but grand and great-grandchildren will be left to pick up the pieces.

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