The creator of leading recession indicator says 'this time is different'

Former Federal Reserve economist Claudia Sahm says her famed recession indicator has already flashed red, but that doesn’t necessarily mean the U.S. economy is in a downturn.

In a New York Times op-ed, Sahm observed that the increase in unemployment over the past year is consistent with past recessions.

The Sahm Rule signals recession when the unemployment rate’s three-month moving average increases by at least half a point from its 12-month low. As Creditnews reported, this occurred in July.

However, the economist wrote that using the Sahm Rule alone is “too simple for this complicated, post-pandemic time.”

“The United States is not in a recession or even on the verge of one. GDP is on track to grow about 3% for the second straight quarter,” she concluded.

Sahm was referring to the economy’s stronger-than-expected 3% growth between April and June. By her estimates, a repeat performance is likely in the third quarter.

The economy’s other major backstop is the Fed, which lowered interest rates by 0.5% last week.

Although Sahm admitted that “a half-point cut is a big deal,” she said it’s nothing to be alarmed about because the Fed will likely reduce rates in smaller increments moving forward.

In her view, central bankers are cutting interest rates to avoid a recession—not because the economy is already in one.

Despite Sahm’s confidence, not everyone is convinced that the Fed can prevent the economy from entering a downturn.

The hangover of high rates is still being felt

According to economist David Rosenberg, the Fed’s large interest rate cut last week is an admission that “monetary policy has been too tight for too long.”

The Fed now finds itself behind the curve, with the economy still feeling the effects of its massive rate hike campaign in 2022 and 2023.

“While the rate cut may delay the recession, it won’t prevent it entirely,” said Rosenberg.

Analysts at JPMorgan share some of Rosenberg’s concerns, pegging the odds of a 2024 recession at 35%. However, those odds jump to 45% by the end of next year.

Other experts, such as Amy Nixon, believe the U.S. recession will be “backdated” as government statisticians revise previous economic data.

Nixon’s grim warning came after the Bureau of Labor Statistics reported that it overcounted job growth by an eye-watering 818,000 positions between March 2023 and March 2024.

Meanwhile, a New York Fed analysis of U.S. Treasury spreads shows a nearly 62% chance of an economic downturn in the next 12 months.

Although the economy has avoided a technical recession this year, certain sectors have been in the gutter for a long time.

According to the Institute for Supply Management (ISM), domestic manufacturing has been in negative growth for at least five months. ISM’s manufacturing PMI was firmly below 50 in August—a level normally associated with contraction.

Timothy Fiore, who chairs ISM’s manufacturing business survey, said companies are refusing to invest because of the current state of interest rates and election uncertainty.

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