August 16, 2024 • 25 mins
The Federal Reserve appears to be ready to pivot into rate cutting mode. Inflation has come down significantly, and the unemployment rate has been trending upward for most of the year. In fact, in the most recent Non-Farm Payrolls report, the headline unemployment rate of 4.3% triggered the so-called "Sahm Rule," which has been a historically reliable signal that the US is already in a recession. So are we in a recession? Could the rule be wrong this time due the unique features of this economic cycle? How should the Fed weigh the risks that we see in front of us? On this episode of Lots More, we speak with the rule's creator, Clauda Sahm, Bloomberg Opinion contributor and the chief economist at New Century Advisors. She explains why the signal this time could be misleading, but also why — regardless of whether we're in a recession or not — the Fed must be on guard for a weakening labor market.
Read More:
My Recession Rule Was Meant to Be Broken
What’s the Sahm Rule? Is It Warning of a Recession?
Only Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:03):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:10):
Hi Claudia, Hello, how are you doing good? How are
you doing pretty good? It's a little calmer this week, so.
Speaker 3 (00:17):
Oh yeah last week. Last week was a little nuts.
Speaker 1 (00:19):
Last week was nuts. Oh my gosh.
Speaker 2 (00:21):
Yeah, so good to catch breath.
Speaker 1 (00:25):
Sometimes I wonder if you have a Google alert set
up for some and if it's just like going off constantly.
You know, in the past ten days.
Speaker 2 (00:33):
There were several hits of my Google alerts, the last couple.
I don't have one on the Sam rule. I think
that probably would have been even more out of control.
Speaker 3 (00:45):
I did a deadlift one two, Jimmy, Okay, what's.
Speaker 2 (00:51):
Uh, Barges?
Speaker 3 (00:52):
This isn't after school special, except.
Speaker 1 (00:54):
I've decided I'm going to base my entire personality going
forward on campaigning for a strategic pork reserve and the.
Speaker 3 (01:00):
Where's the Best with imposta.
Speaker 1 (01:02):
These are the important question. Is that robots taking over
the world. No.
Speaker 3 (01:05):
I think that like in a couple of years, the
AI will do a really good job of making the
Odd lotch podcast. And people say, I don't really need
to listen to Joe and Tracy anymore. We do have.
Speaker 1 (01:17):
Touching you're listening to lots More, where we catch up
with friends about what's going on right now, because.
Speaker 3 (01:25):
Even when the odd lots is over, there's always lots more.
Speaker 1 (01:28):
And we really do have the perfect guest. We are
speaking with Claudia Salm, of course, the creator of these
PSALM rules. She is chief economist and New Century Advisors
and also a columnist at Bloomberg. And you've been in
the news a lot recently, Claudia, because actually I can't
(01:49):
figure this out. Has your rule actually triggered or not?
Speaker 2 (01:54):
It has. The way that I calculated this rule, and
it's very it was very close to the trigger. So
the value in July is zero point five three and
the threshold is point five or above. And there have
been people doing various calculations off the same principle, a
change in the unemployment rate a relative to the past
(02:16):
twelve months, and you can get very small differences depending
on how you do it. I think that just says
I mean, it's right at the edge. But the official
Saw rule is triggered.
Speaker 3 (02:25):
And every time I write about the sum rule, I'm
always like, only ninety nine percent sure or ninety percent try.
I remember what it is and I always go look
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
(02:49):
time that has happened, every time it's written above gotten
above half of a percent, a recession came soon thereafter.
Is that correct?
Speaker 2 (02:57):
Yeah, I have a half a percent or more. Yeah,
it can. And that's historically, and in particular, that very
kind of precise record is in the data as it
was published at the time, right so right around. But
(03:18):
in principle, yes, and you know the important things. You
take the three month moving average, so you smooth out
over time. You take that currently three month average, look
at the low of the three month averages over the
prior twelve months, not including the current the prior, and
those are the changes. And but it all is I
think like the formula, the thresholds very much go back
(03:41):
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
(04:02):
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
(04:25):
recessions damaging.
Speaker 1 (04:27):
So this is important. So the origin of the rule
is that you wanted something that was dependable that you
could use as more or less immediate guidance for the
government to actually come in and do something about recession.
But because the rule is also encoded and calculated in
a very specific way, so the US is entering recession
(04:50):
whenever unemployment is running zero point five percentage points higher
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.
Speaker 2 (05:11):
Right, it's because again the goal was looking back over history,
what is the formula the rule that would get to
turn on fiscal relief, so stabilization as early as possible
in a recession, so it could do the most good
and also be as accurate as possible, right as looking
back over history. So in the United States, you can
(05:33):
look back over several decades. I mean, I'm moving across
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
(05:54):
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
(06:16):
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
(06:37):
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.
Speaker 3 (06:49):
So you developed this role in part to guide countercyclical
fiscal policy. Right now, it's pretty clear that we're nowhere
near any sort of political will. We're going to start
sending checks it and so if there's going to be
a response to the weakness, it's going to come on
the monetary policy side. Expectation is for some sort of
rate cut. In September, when we got that last unemployment
(07:10):
report and the some rule did technically trigger, there was
a lot of debate. Is it different this time? This
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
(07:33):
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.
Speaker 2 (07:48):
Yes, so it is always risky to go down that
this time is different. And there's a long historical record
of explaining away bad news that that ends up being
actually it was bad news and that was your chance
to see it. So no, I take this very Yeah,
this is this is tough, right, It's been tough to
think about what's wrong here and pull out the actual
(08:09):
like what's the right message from the labor market, and
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
(08:31):
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
(08:53):
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,
(09:14):
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
(09:37):
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
(09:58):
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
(10:19):
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
(10:39):
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
(10:59):
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
(11:22):
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.
Speaker 1 (11:45):
You've talked about this, right, the idea that in some
ways unemployment can be exponential and can kind of start
filtering on itself.
Speaker 2 (11:53):
Yeah, exactly.
Speaker 3 (11:54):
Yeah, And to Claudia, I mean to your point, which
is is, technically, I think the recession, the financial crisis,
recession ended like in the summer of two thousand and nine,
the unemployment rate in that cycle, it actually technically peaked
in the October two thousand and nine report at ten percent,
so that was after To your point, Claudia, so why
(12:15):
would it be different this time? I mean, like you say,
there's this danger, and yes, COVID messed with stuff, et cetera.
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.
Speaker 2 (12:31):
We should take the increase in the unemployment rate seriously
in terms of the direction, right, it is rising, there
is weakening demand for labor, yes, and that is so
like setting all of this aside about the Samari recession
not a recession, like the direction we are on is
a until it levels out is a problem, okay, right,
(12:55):
and we can talk about there are reasons, you know,
the Federal Reserve has interest rates high because they are
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
(13:17):
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
(13:38):
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.
(14:04):
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
(14:24):
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
(14:46):
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
(15:09):
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
(15:32):
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
(15:56):
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
(16:20):
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
(16:41):
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
(17:03):
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
(17:24):
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
(17:45):
process of jobs. Like the stronger the job market is,
the faster we can bring in these workers.
Speaker 1 (17:51):
So this is kind of the other reason why your
some Google alert would have been going off like crazy
over the past week or so. There's also so like
everything in the world nowadays, at least in the US,
there seems to be this intense politicization of this particular
economic rule and of the jobs market end of what
(18:12):
the FED should do. And I think like some of
the irony of the current moment is you see accusations
that the FED is behind the curve. You see accusations
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
(18:35):
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.
Speaker 2 (18:48):
So to be honest, I haven't tried to engage in
that discussion because I didn't think, I mean, it's this rule,
it's a tool. I might this is a really important
time to have a robust discussion about what's happening in
the US labor market from the vantage point of policymakers
or businesses, households. Right, so that it is timed with
(19:10):
an election year, that's unfortunate, But I had, you know,
I had been aware, like realizing this dynamic before last week.
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
(19:32):
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.
(19:54):
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
(20:17):
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,
(20:40):
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.
Speaker 3 (21:04):
This is my summary of your views, and tell me
if I'm wrong. There are reasons to think that, unlike
past times when the sum rule has triggered, we may
not be in a recession because other economic data looks
good and much of the upward push and the unemployment
rate is due to the influx of labor supply. Yet
on the other hand, there is this clear deceleration in
(21:26):
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.
Speaker 2 (21:47):
Yeah, at this point they can just take their foot
off the brake a little bit. This isn't even because
again this is where when FED policy makers or FED
cher J. Powell the last press conference, Bioko, we got
the July data, essentially saying we the FED don't want
to see more weakness in the labor market or weakening,
(22:07):
and it's like, well, you left rates uncut, right, It's like,
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
(22:28):
what it is that levels it out?
Speaker 3 (22:31):
Right?
Speaker 2 (22:32):
What is it that helps us stay at this place?
And yeah, it creates the demand for labor, yeah, or
just yeah, creates the demand levels out this weakening? Wait,
I agree, the labor market was really firing on all cylinders,
and labor shortages were very disruptive. So we were going
to see job gains slow, we were going to see
(22:53):
the unemployment rate drift up some. But you're getting to
a place now where yeah, the level looks really pretty good,
I mean not really pre pandemic good levels. But the
direction is a problem. That's the piece I think has
to have a focus in policy maker's mind. But then
(23:14):
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.
Speaker 1 (23:30):
Claudia, did you see Ben emons he did a some
role with initial job as claims. Did you look at that?
Speaker 2 (23:38):
I am thrilled to have warned particular on this, Like
we are in a recession indicators things, so I still
think there's a long there's a long way to go
in a lot of work to do on say these
semi automatic stabilizers, fiscal policy put on autopilot. I think
it's still worth pursuing. And it's clear like if this
(24:00):
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
(24:22):
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.
Speaker 3 (24:30):
We'll find out one day in the long future what
the NBER says was really going on in summer twenty
twenty four.
Speaker 1 (24:37):
That's the great thing about the current economic moment is
like we are actually going to learn a lot of
things from it.
Speaker 3 (24:42):
Someone will be proven right, someone will be proven wrong,
and then there will be a new set of debates
all over again. It never it will never end.
Speaker 2 (24:48):
Yeah, so it goes.
Speaker 1 (24:55):
Lots More. Is produced by Carmen Rodriguez and Dashel Bennett,
with help from Moses onom kel Brooks.
Speaker 3 (25:01):
Our sound engineer is Blake Maples. Sage Bauman is the
head of Bloomberg Podcasts.
Speaker 1 (25:05):
Please rate, review, and subscribe to add Lots and Lots
More on your favorite podcast platforms.
Speaker 3 (25:11):
And remember that Bloomberg subscribers can listen to all of
our podcasts add free by connecting through Apple Podcasts. Thanks
for listening.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:10):
Hi Claudia, Hello, how are you doing good? How are
you doing pretty good? It's a little calmer this week, so.
Speaker 3 (00:17):
Oh yeah last week. Last week was a little nuts.
Speaker 1 (00:19):
Last week was nuts. Oh my gosh.
Speaker 2 (00:21):
Yeah, so good to catch breath.
Speaker 1 (00:25):
Sometimes I wonder if you have a Google alert set
up for some and if it's just like going off constantly.
You know, in the past ten days.
Speaker 2 (00:33):
There were several hits of my Google alerts, the last couple.
I don't have one on the Sam rule. I think
that probably would have been even more out of control.
Speaker 3 (00:45):
I did a deadlift one two, Jimmy, Okay, what's.
Speaker 2 (00:51):
Uh, Barges?
Speaker 3 (00:52):
This isn't after school special, except.
Speaker 1 (00:54):
I've decided I'm going to base my entire personality going
forward on campaigning for a strategic pork reserve and the.
Speaker 3 (01:00):
Where's the Best with imposta.
Speaker 1 (01:02):
These are the important question. Is that robots taking over
the world. No.
Speaker 3 (01:05):
I think that like in a couple of years, the
AI will do a really good job of making the
Odd lotch podcast. And people say, I don't really need
to listen to Joe and Tracy anymore. We do have.
Speaker 1 (01:17):
Touching you're listening to lots More, where we catch up
with friends about what's going on right now, because.
Speaker 3 (01:25):
Even when the odd lots is over, there's always lots more.
Speaker 1 (01:28):
And we really do have the perfect guest. We are
speaking with Claudia Salm, of course, the creator of these
PSALM rules. She is chief economist and New Century Advisors
and also a columnist at Bloomberg. And you've been in
the news a lot recently, Claudia, because actually I can't
(01:49):
figure this out. Has your rule actually triggered or not?
Speaker 2 (01:54):
It has. The way that I calculated this rule, and
it's very it was very close to the trigger. So
the value in July is zero point five three and
the threshold is point five or above. And there have
been people doing various calculations off the same principle, a
change in the unemployment rate a relative to the past
(02:16):
twelve months, and you can get very small differences depending
on how you do it. I think that just says
I mean, it's right at the edge. But the official
Saw rule is triggered.
Speaker 3 (02:25):
And every time I write about the sum rule, I'm
always like, only ninety nine percent sure or ninety percent try.
I remember what it is and I always go look
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
(02:49):
time that has happened, every time it's written above gotten
above half of a percent, a recession came soon thereafter.
Is that correct?
Speaker 2 (02:57):
Yeah, I have a half a percent or more. Yeah,
it can. And that's historically, and in particular, that very
kind of precise record is in the data as it
was published at the time, right so right around. But
(03:18):
in principle, yes, and you know the important things. You
take the three month moving average, so you smooth out
over time. You take that currently three month average, look
at the low of the three month averages over the
prior twelve months, not including the current the prior, and
those are the changes. And but it all is I
think like the formula, the thresholds very much go back
(03:41):
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
(04:02):
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
(04:25):
recessions damaging.
Speaker 1 (04:27):
So this is important. So the origin of the rule
is that you wanted something that was dependable that you
could use as more or less immediate guidance for the
government to actually come in and do something about recession.
But because the rule is also encoded and calculated in
a very specific way, so the US is entering recession
(04:50):
whenever unemployment is running zero point five percentage points higher
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.
Speaker 2 (05:11):
Right, it's because again the goal was looking back over history,
what is the formula the rule that would get to
turn on fiscal relief, so stabilization as early as possible
in a recession, so it could do the most good
and also be as accurate as possible, right as looking
back over history. So in the United States, you can
(05:33):
look back over several decades. I mean, I'm moving across
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
(05:54):
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
(06:16):
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
(06:37):
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.
Speaker 3 (06:49):
So you developed this role in part to guide countercyclical
fiscal policy. Right now, it's pretty clear that we're nowhere
near any sort of political will. We're going to start
sending checks it and so if there's going to be
a response to the weakness, it's going to come on
the monetary policy side. Expectation is for some sort of
rate cut. In September, when we got that last unemployment
(07:10):
report and the some rule did technically trigger, there was
a lot of debate. Is it different this time? This
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
(07:33):
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.
Speaker 2 (07:48):
Yes, so it is always risky to go down that
this time is different. And there's a long historical record
of explaining away bad news that that ends up being
actually it was bad news and that was your chance
to see it. So no, I take this very Yeah,
this is this is tough, right, It's been tough to
think about what's wrong here and pull out the actual
(08:09):
like what's the right message from the labor market, and
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
(08:31):
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
(08:53):
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,
(09:14):
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
(09:37):
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
(09:58):
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
(10:19):
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
(10:39):
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
(10:59):
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
(11:22):
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.
Speaker 1 (11:45):
You've talked about this, right, the idea that in some
ways unemployment can be exponential and can kind of start
filtering on itself.
Speaker 2 (11:53):
Yeah, exactly.
Speaker 3 (11:54):
Yeah, And to Claudia, I mean to your point, which
is is, technically, I think the recession, the financial crisis,
recession ended like in the summer of two thousand and nine,
the unemployment rate in that cycle, it actually technically peaked
in the October two thousand and nine report at ten percent,
so that was after To your point, Claudia, so why
(12:15):
would it be different this time? I mean, like you say,
there's this danger, and yes, COVID messed with stuff, et cetera.
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.
Speaker 2 (12:31):
We should take the increase in the unemployment rate seriously
in terms of the direction, right, it is rising, there
is weakening demand for labor, yes, and that is so
like setting all of this aside about the Samari recession
not a recession, like the direction we are on is
a until it levels out is a problem, okay, right,
(12:55):
and we can talk about there are reasons, you know,
the Federal Reserve has interest rates high because they are
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
(13:17):
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
(13:38):
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.
(14:04):
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
(14:24):
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
(14:46):
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
(15:09):
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
(15:32):
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
(15:56):
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
(16:20):
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
(16:41):
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
(17:03):
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
(17:24):
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
(17:45):
process of jobs. Like the stronger the job market is,
the faster we can bring in these workers.
Speaker 1 (17:51):
So this is kind of the other reason why your
some Google alert would have been going off like crazy
over the past week or so. There's also so like
everything in the world nowadays, at least in the US,
there seems to be this intense politicization of this particular
economic rule and of the jobs market end of what
(18:12):
the FED should do. And I think like some of
the irony of the current moment is you see accusations
that the FED is behind the curve. You see accusations
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
(18:35):
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.
Speaker 2 (18:48):
So to be honest, I haven't tried to engage in
that discussion because I didn't think, I mean, it's this rule,
it's a tool. I might this is a really important
time to have a robust discussion about what's happening in
the US labor market from the vantage point of policymakers
or businesses, households. Right, so that it is timed with
(19:10):
an election year, that's unfortunate, But I had, you know,
I had been aware, like realizing this dynamic before last week.
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
(19:32):
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.
(19:54):
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
(20:17):
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,
(20:40):
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.
Speaker 3 (21:04):
This is my summary of your views, and tell me
if I'm wrong. There are reasons to think that, unlike
past times when the sum rule has triggered, we may
not be in a recession because other economic data looks
good and much of the upward push and the unemployment
rate is due to the influx of labor supply. Yet
on the other hand, there is this clear deceleration in
(21:26):
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.
Speaker 2 (21:47):
Yeah, at this point they can just take their foot
off the brake a little bit. This isn't even because
again this is where when FED policy makers or FED
cher J. Powell the last press conference, Bioko, we got
the July data, essentially saying we the FED don't want
to see more weakness in the labor market or weakening,
(22:07):
and it's like, well, you left rates uncut, right, It's like,
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
(22:28):
what it is that levels it out?
Speaker 3 (22:31):
Right?
Speaker 2 (22:32):
What is it that helps us stay at this place?
And yeah, it creates the demand for labor, yeah, or
just yeah, creates the demand levels out this weakening? Wait,
I agree, the labor market was really firing on all cylinders,
and labor shortages were very disruptive. So we were going
to see job gains slow, we were going to see
(22:53):
the unemployment rate drift up some. But you're getting to
a place now where yeah, the level looks really pretty good,
I mean not really pre pandemic good levels. But the
direction is a problem. That's the piece I think has
to have a focus in policy maker's mind. But then
(23:14):
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.
Speaker 1 (23:30):
Claudia, did you see Ben emons he did a some
role with initial job as claims. Did you look at that?
Speaker 2 (23:38):
I am thrilled to have warned particular on this, Like
we are in a recession indicators things, so I still
think there's a long there's a long way to go
in a lot of work to do on say these
semi automatic stabilizers, fiscal policy put on autopilot. I think
it's still worth pursuing. And it's clear like if this
(24:00):
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
(24:22):
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.
Speaker 3 (24:30):
We'll find out one day in the long future what
the NBER says was really going on in summer twenty
twenty four.
Speaker 1 (24:37):
That's the great thing about the current economic moment is
like we are actually going to learn a lot of
things from it.
Speaker 3 (24:42):
Someone will be proven right, someone will be proven wrong,
and then there will be a new set of debates
all over again. It never it will never end.
Speaker 2 (24:48):
Yeah, so it goes.
Speaker 1 (24:55):
Lots More. Is produced by Carmen Rodriguez and Dashel Bennett,
with help from Moses onom kel Brooks.
Speaker 3 (25:01):
Our sound engineer is Blake Maples. Sage Bauman is the
head of Bloomberg Podcasts.
Speaker 1 (25:05):
Please rate, review, and subscribe to add Lots and Lots
More on your favorite podcast platforms.
Speaker 3 (25:11):
And remember that Bloomberg subscribers can listen to all of
our podcasts add free by connecting through Apple Podcasts. Thanks
for listening.
Hosts And Creators
Joe Weisenthal
Tracy Alloway
Popular Podcasts
Are You A Charlotte?
In 1997, actress Kristin Davis’ life was forever changed when she took on the role of Charlotte York in Sex and the City. As we watched Carrie, Samantha, Miranda and Charlotte navigate relationships in NYC, the show helped push once unacceptable conversation topics out of the shadows and altered the narrative around women and sex. We all saw ourselves in them as they searched for fulfillment in life, sex and friendships. Now, Kristin Davis wants to connect with you, the fans, and share untold stories and all the behind the scenes. Together, with Kristin and special guests, what will begin with Sex and the City will evolve into talks about themes that are still so relevant today. "Are you a Charlotte?" is much more than just rewatching this beloved show, it brings the past and the present together as we talk with heart, humor and of course some optimism.
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com