Claudia Sahm's Recession Indicator Under Scrutiny

Introduction to the McKelvey Recession Indicator

Edward McKelvey, a senior economist at Goldman Sachs, developed a recession indicator that has recently been modified by Claudia Sahm, a former Federal Reserve and White House Economist. The initial indicator involved taking the current value of the 3-month unemployment rate average, subtracting the 12-month low, and if the difference is 0.30 percentage point or more, then a recession has started. Sahm altered the indicator from 0.3 to 0.5.

Sahm's Denial of Her Own Rule

Despite the fact that her rule indicated a recession in August, Sahm has denied this. She discovered the rule while studying previous recessions as part of a project to help policymakers prepare for the next one. Sahm has explained that the unemployment rate, which the rule relies on, has an Achilles’ heel: It doesn’t only go up when people lose their jobs, but can also rise when the number of people looking for jobs increases.

Scrutiny of Sahm's Denial

However, Sahm's explanation has been scrutinized. In 7 of 10 recessions, the labor force was higher in the third month of recession than the start of it, which would tend to raise the unemployment rate as Sahm suggests. But this is also normal behavior. In two recessions, 1970 and 1973, employment was higher in the third month of recession than the first, contradicting the idea that the labor market is too strong for a recession to have started.

Recession Supporting Factors

Several factors have been identified that support the possibility of a recession. These include slowing growth in construction spending, negative job revisions, and conditions that are worse now than at the start of the Great Recession, according to the Fed Beige Book.

Bottom Line

While Sahm's recession indicator has been triggered, she herself does not believe a recession has started. This has led to a debate about the accuracy of the indicator and its reliance on the unemployment rate. Given the various factors supporting the possibility of a recession, it is worth considering whether Sahm's denial is justified. What are your thoughts on this matter? Do you think Sahm's recession indicator is accurate? Share your thoughts and this article with your friends. Also, don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.