Recession outlook: Why the economy could end up in a recession in 3, 6 months, Claudia Sahm explains

Summary

In this interview, Chief Economist Claudia discusses the PSM rule, a recession indicator that triggers when the three-month moving average of the unemployment rate increases by half a percentage point from the previous year. With the rate now at 4.3%, the highest in nearly three years, she assesses the current economic situation as concerning but not yet a recession. Claudia highlights the Federal Reserve's policy tools and the importance of the labor market's health, suggesting that while there are signs of weakness, there is potential for recovery if the right measures are taken.

Takeaways

• 📈 The unemployment rate has risen to 4.3%, the highest in nearly 3 years, triggering the PSM rule, which is an indicator of a potential recession.
• 🔢 The PSM rule suggests that if the three-month moving average of the unemployment rate increases by half a percentage point from the previous year, it signals the start of a recession.
• 👩‍💼 Claudia, the chief economist at New Century Advisers, is the creator of the PSM rule and believes the current situation is not a recession but acknowledges concerns about the labor market.
• 🕒 According to Claudia, the PSM rule indicates that we might be about 3 months into a recession, but she emphasizes that current global conditions are not normal, affecting the rule's interpretation.
• 🌐 The pandemic and other labor force shocks have created an unusual context, making the interpretation of the PSM rule more challenging than in historical precedents.
• 📉 The script mentions that two quarters of GDP declines occurred in 2022, but a recession was not declared, highlighting the complexity of current economic indicators.
• 🛑 Claudia suggests that while a recession is not her base case, there are signs of concern, such as the increase in unemployment rate and softening labor market, which could lead to a recession in 3 to 6 months.
• 💼 The Federal Reserve has policy levers it can use, such as lowering interest rates, to mitigate economic downturns, indicating there are tools available to manage the situation.
• 💹 Despite concerns, Claudia believes that the economy is fundamentally healthy and that policymakers are aware of the need to address the weakening labor market.
• 🗓️ The script discusses the possibility of the Federal Reserve making a move before its September meeting, with markets pricing in a higher likelihood of a 50 basis point cut.
• 🏛️ Claudia emphasizes that the PSM rule is meant to guide fiscal policy during recessions and avoid political influence, aiming to take proactive steps when the economy is in a precarious state.

Q & A

What is the PSM rule and who created it?

The PSM rule, created by Claudia Sahm, states that if the three-month moving average of the unemployment rate rises by half a percentage point from the previous year, it signals the start of a recession.

What is the current unemployment rate mentioned in the transcript?

The current unemployment rate mentioned in the transcript is 4.3%, the highest level in nearly three years.

According to Claudia Sahm, are we currently in a recession?

According to Claudia Sahm, despite the increase in the unemployment rate, we are not currently in a recession, but there is a concern that we could end up in one within the next 3 to 6 months.

What are some factors that make the current situation different from previous historical patterns?

Factors making the current situation different include the shocks from the pandemic, significant changes in the labor force, a surge in immigration, and the fast re-entry of people into the labor force, which have all influenced the unemployment rate in atypical ways.

Why is the increase in the unemployment rate not necessarily indicative of a recession, according to Claudia Sahm?

The increase in the unemployment rate is partly due to the rapid changes in the labor force, such as the influx of new workers from immigration and those re-entering the workforce post-pandemic, which temporarily pushes up the unemployment rate.

What tools does Claudia Sahm believe the Federal Reserve can use to prevent a recession?

Claudia Sahm believes the Federal Reserve can use policy levers like gradually lowering interest rates to take pressure off the economy and help maintain a stable labor market.

What is Claudia Sahm's base case for the Federal Reserve's actions in the near future?

Claudia Sahm's base case is that the Federal Reserve will start making changes in interest rates in September, rather than before, as pre-September actions would indicate a crisis, which she does not believe we are currently in.

How does Claudia Sahm view the health of the US economy currently?

Claudia Sahm views the US economy as healthy overall, with a strong labor market and solid consumer spending and income, though there are concerns about the direction of travel and potential weakening.

What are Claudia Sahm's views on the likelihood of a recession within the next six months?

Claudia Sahm considers the odds of a recession within the next six months to be elevated but not her base case. She sees a path to avoiding a recession if appropriate measures, such as policy adjustments by the Federal Reserve, are taken.

What does Claudia Sahm say about the potential for the Federal Reserve to make a move outside of their regular meetings?

Claudia Sahm mentions that moves by the Federal Reserve outside of their regular meetings are very rare and usually occur only in crisis situations, which she does not believe is the current case.