Claudia Sahm31 January 2024

At the Money: Forecasting Recessions with Claudia Sahm

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7Insights

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The Sahm Rule

Detect recessions in real time through a sustained rise in unemployment

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 2

Myth Buster03:55

Why Two Negative GDP Quarters Do Not Automatically Mean Recession

Two consecutive quarters of falling GDP are a popular rule of thumb, not the official US recession definition. The post-pandemic economy produced this unusual pattern without an NBER-designated recession, demonstrating that historically dependable shortcuts can fail.

The NBER considers multiple economic indicators
Two negative GDP quarters are not an official US definition
The pattern can occur outside a recession
Pandemic distortions weakened familiar historical relationships

“That's not an official indicator anywhere.”
Barry Ritholtz · 04:03

“So that just shows one should be really careful right now with the rules of thumb that have worked in the past.”
Claudia Sahm · 04:39

#gdp#nber#recession myths#pandemic

Myth Buster09:28

Why a Perfect Recession Signal Could Break This Time

Sahm acknowledges that her indicator could trigger without a recession if unemployment rises modestly and then stabilizes. The post-pandemic return of workers and immigrants could temporarily leave job creation lagging labor-force growth without causing a broad economic collapse.

Historical accuracy does not make an indicator infallible
Past triggers were followed by much larger unemployment increases
Returning workers can lift measured unemployment during normalization
Pandemic-era labor shortages and visa disruptions changed labor dynamics
A trigger could occur even if unemployment later stabilizes

“Absolutely, if the sawmo we're going to break, it would be this time”
Claudia Sahm · 09:40

“There's a very good case for why this could happen. It goes back to these disruptions of COVID.”
Claudia Sahm · 10:18

#sahm rule#labor supply#unemployment#pandemic recovery

Hot Take· 1

Hot Take08:13

Recessions Are Not Supposed to Be Forecastable

Sahm challenges the confidence behind two years of repeated recession calls. Because comparable inflation episodes lie around world wars and pandemics, economists lacked a large, directly relevant historical sample for confident predictions.

Loud recession forecasts persisted for roughly two years
Reliable long-range recession prediction is inherently difficult
Recent inflation had few useful modern precedents
Available data encouraged analysts to default to a misleading 1970s comparison

“Recessions aren't supposed to be forecastable”
Claudia Sahm · 08:26

“we're certainly not supposed to be so certain about it.”
Claudia Sahm · 08:40

#forecasting#economic history#recessions#uncertainty

Explainer· 3

Explainer01:22

What Actually Defines a Recession?

Sahm defines a recession as a broad contraction rather than weakness confined to one industry or region. Its severity depends on the shock, with the 2001 downturn much milder than the global financial crisis.

A recession affects economic activity broadly
It is not defined by one struggling industry or region
The initiating shock influences its depth
GDP and unemployment can deteriorate by different amounts across recessions

“A recession is a broad based contraction and economic activity.”
Claudia Sahm · 01:28

“So it depends on what hits us as to how hard we go down.”
Claudia Sahm · 02:08

#recessions#gdp#unemployment

Explainer06:04

Why Economists Kept Expecting a Recession That Never Arrived

Many economists interpreted post-pandemic inflation through a 1970s demand-and-monetary-policy lens. Sahm argues that COVID disruptions and the invasion of Ukraine were major supply-side causes that higher interest rates could not directly repair.

Economists relied heavily on the 1970s inflation analogy
COVID disrupted production, logistics, work, and consumption
The war in Ukraine created additional supply shocks
Interest-rate increases could not unload ports or restore labor supply
Inflation fell sharply while unemployment remained historically low

“Many economists, many of my peers, got stuck in the nineteen seventies”
Claudia Sahm · 06:39

“That's not demand, that's not what interest rates solve.”
Claudia Sahm · 07:23

#inflation#federal reserve#supply shocks#soft landing

Explainer12:24

How Labor-Market Weakness Turns Into a Recession

Sahm describes the causal chain connecting jobs to economic contraction. Employment produces paychecks, paychecks support consumer spending, and widespread consumer weakness can pull the broader economy and stock market downward.

Paychecks are the foundation of household spending
Labor-market losses weaken consumers
Consumer weakness can drive a broad contraction
Recessions typically coincide with weak stock markets

“Like your paycheck, that's what you spend.”
Claudia Sahm · 12:42

“So if we lose the labor market, we lose consumers. If we lose consumers, we're done.”
Claudia Sahm · 12:48

#labor market#consumer spending#recessions#stocks

Takeaway· 1

Takeaway11:01

The Overlooked Strength in Post-Pandemic Employment

The labor-market recovery brought several groups back into employment at unusually strong rates. Sahm highlights record employment among prime-age women and workers with disabilities, alongside encouraging participation and unemployment figures for Black workers.

Prime-age women's employment reached a record high
Employment among workers with disabilities reached a record high
Black men's labor-force participation improved
A broader workforce can relieve talent shortages
Continued participation supports productivity and economic growth

“Women's prime age employment is at record highs, the percent of workers with disabilities who have jobs record high”
Claudia Sahm · 11:39

“there's still a need for talent and productivity”
Barry Ritholtz · 12:15

#employment#labor force#inclusion#productivity