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At the Money: Forecasting Recessions with Claudia Sahm · Masters in Business

• 0:00
  Speaker 1: Investors don't love recessions. Bad things happen when the economy contracts.
• 0:05
  Speaker 1: Top line corporate growth stops, revenue and earnings fall. That
• 0:10
  Speaker 1: sends stock prices lower. Ever since the pandemic ended, lots
• 0:16
  Speaker 1: of investors fearing a recession was imminent have gotten scared
• 0:20
  Speaker 1: out of equity markets that any day now recession still
• 0:25
  Speaker 1: hasn't shown up. This is despite the prediction of many
• 0:29
  Speaker 1: well known economists over the past two years, there still
• 0:33
  Speaker 1: has been no recession. As it turns out, there are
• 0:36
  Speaker 1: ways investors can tell if an economic contraction is really coming.
• 0:52
  Speaker 1: I'm Barry Results and on today's edition of At the Money,
• 0:56
  Speaker 1: we're going to discuss how to accurately identify in advance,
• 1:00
  Speaker 1: in real time when the economy is going into recession.
• 1:05
  Speaker 1: To help us unpack all of this and what it
• 1:06
  Speaker 1: means for your portfolio, let's bring in Claudia Sam. She
• 1:10
  Speaker 1: is a former Federal Reserve economist and creator of what
• 1:15
  Speaker 1: has become known as the Sam Rule. Claudia, welcome to
• 1:19
  Speaker 1: Bloomberg's At the Money.
• 1:21
  Speaker 2: Happy to be here.
• 1:22
  Speaker 1: So let's start with the basics. Tell us what happens
• 1:24
  Speaker 1: to the economy during a recession.
• 1:28
  Speaker 3: A recession is a broad based contraction and economic activity.
• 1:33
  Speaker 3: So it's not about one industry, it's not about one
• 1:35
  Speaker 3: part of the country. It hits all of us, and
• 1:38
  Speaker 3: a recession hits hard. It's and that's why we want
• 1:43
  Speaker 3: to fight them. That's why we want to know if
• 1:44
  Speaker 3: they're coming.
• 1:45
  Speaker 1: So that obviously is not great. How long and deep
• 1:49
  Speaker 1: are the typical recessions.
• 1:51
  Speaker 2: It varies. It depends on what happened.
• 1:54
  Speaker 3: The global financial crisis in two thousand and eight, that
• 1:58
  Speaker 3: was a big, fast de recession that was very bad.
• 2:01
  Speaker 3: Two thousand and one, the bursting of the dot com bubble,
• 2:05
  Speaker 3: that's one of the mildest recessions that we've seen in
• 2:08
  Speaker 3: a very long time. So it depends on what hits
• 2:11
  Speaker 3: us as to how hard we go down.
• 2:15
  Speaker 1: Really interesting, it's funny you mentioned one because the year
• 2:18
  Speaker 1: before and the year after two thousand and two thousand
• 2:20
  Speaker 1: and two was one of those rare years where the
• 2:23
  Speaker 1: stock market was down even though there wasn't a recession. Surprisingly,
• 2:28
  Speaker 1: that was a fairly mild recession. Where did the two
• 2:31
  Speaker 1: thousand and one recession show up in the data?
• 2:35
  Speaker 3: In two thousand and one, we saw the unemployment rate rise,
• 2:38
  Speaker 3: not as much as in two thousand and eight or
• 2:40
  Speaker 3: in twenty twenty, and we did see GDP decline, though
• 2:46
  Speaker 3: it was not as severe as we've seen in other recessions.
• 2:50
  Speaker 1: So you developed an indicator what people call the Soalm rule,
• 2:54
  Speaker 1: to help us figure out in advance when recessions are
• 2:57
  Speaker 1: coming tell us about it.
• 3:00
  Speaker 3: UM looks for relatively small increases in the unemployment rate
• 3:04
  Speaker 3: to say we're in a recession. Specifically, we look at
• 3:07
  Speaker 3: the unemployment rate, the national unemployment rate, take the three
• 3:10
  Speaker 3: month average. We don't want to get faked out by
• 3:13
  Speaker 3: the bumps and wiggles. We compare the most recent reading
• 3:16
  Speaker 3: to the lowest of these three month averages over the
• 3:19
  Speaker 3: prior twelve months. If that difference is a half a
• 3:22
  Speaker 3: percentage point or more, we are in a recession.
• 3:26
  Speaker 1: So let me get a little more specific. How timely
• 3:31
  Speaker 1: is this indicator when it goes offen what's its track
• 3:34
  Speaker 1: record been like.
• 3:35
  Speaker 3: It has a perfect track record since nineteen seventies. It's
• 3:38
  Speaker 3: never triggered outside of a recession, and it's always triggered
• 3:42
  Speaker 3: early in one, far earlier than we would have the
• 3:46
  Speaker 3: official recession dating by the National Beer of Economic Research,
• 3:51
  Speaker 3: and it's within the first three four months of a recession.
• 3:55
  Speaker 2: And that also is before we would have the.
• 3:58
  Speaker 3: Two quarters of GDP that would typically be used to
• 4:01
  Speaker 3: say we're in a recession.
• 4:03
  Speaker 1: Although we've seen two negative quotas of GDP where we
• 4:06
  Speaker 1: haven't had recessions. That's not an official indicator anywhere.
• 4:10
  Speaker 2: It just seems to.
• 4:11
  Speaker 1: Be a rule of thumb that some countries use, but
• 4:15
  Speaker 1: we don't really use that here in the United States. Right,
• 4:17
  Speaker 1: we have the NBER and all of their many indicators
• 4:22
  Speaker 1: that they track.
• 4:23
  Speaker 3: What's amazing, and so many relationships have broken in this
• 4:27
  Speaker 3: COVID and the recovery that two quarters of a decline
• 4:31
  Speaker 3: in GDP that always happens in a recession.
• 4:35
  Speaker 2: You've got to go back to nineteen.
• 4:36
  Speaker 3: Forty seven to find a time where you have two
• 4:39
  Speaker 3: quarters outside of a recession. So that just shows one
• 4:41
  Speaker 3: should be really careful right now with the rules of
• 4:45
  Speaker 3: thumb that have worked in the past.
• 4:47
  Speaker 1: Right, you can find a good parallel between the post
• 4:49
  Speaker 1: war era and the post pandemic era, giant fiscal stimulus,
• 4:53
  Speaker 1: et cetera. But let's stick with the some rule for
• 4:56
  Speaker 1: a moment. Most economic rules that I'm familiar with, they're
• 5:01
  Speaker 1: pretty complex. They rely on a lot of moving parts.
• 5:04
  Speaker 1: The SAM rule seems fairly simple. A single labor market indicator.
• 5:09
  Speaker 1: Is that oversimplifying the complexity of the economy, or do
• 5:15
  Speaker 1: all roads in the economy lead to the labor market?
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  Speaker 3: This SAM rule is simple by design. Its purpose was
• 5:22
  Speaker 3: to say, hey, Congress, send out the stimulus checks and frankly,
• 5:27
  Speaker 3: do it automatically. Just tie it to the same rule.
• 5:30
  Speaker 3: That's why it exists. It's been used for a lot
• 5:32
  Speaker 3: of other purposes recently, and so but I will say,
• 5:36
  Speaker 3: there's a saying among economists, if you had to be
• 5:39
  Speaker 3: on a desert island and you can only have one
• 5:41
  Speaker 3: data series to tell you what the US economy is doing,
• 5:44
  Speaker 3: it's the unemployment rate. Is it tells us so much
• 5:48
  Speaker 3: for a lot of different reasons. It tells us so
• 5:50
  Speaker 3: much about where we are, and frankly, as you see
• 5:53
  Speaker 3: it start to drift up, it can tell us where
• 5:56
  Speaker 3: we're headed. It's not a perfect signal, but it is
• 5:59
  Speaker 3: something to say, Yeah, it's even before the summ will
• 6:02
  Speaker 3: with trigger you should pay attention to it.
• 6:04
  Speaker 1: So let's talk a little bit about that. You know,
• 6:06
  Speaker 1: since since the pandemic ended, it seems almost immediately after
• 6:11
  Speaker 1: the recovery began, we began hearing about a recession. This
• 6:15
  Speaker 1: is already going on for two years. It's imminent, it's
• 6:18
  Speaker 1: about to happen. And as that drum beat has gotten louder,
• 6:23
  Speaker 1: inflation has gone down, Unemployment has fallen, consumer spending has
• 6:27
  Speaker 1: remained robust, even wage gains have gotten better. If anything,
• 6:31
  Speaker 1: the economy has improved. Why this constant drumbeat that a
• 6:36
  Speaker 1: recession is imminent.
• 6:39
  Speaker 3: Many economists, many of my peers, got stuck in the
• 6:43
  Speaker 3: nineteen seventies, and in the we've had inflation went up,
• 6:47
  Speaker 3: I mean legitimately in twenty twenty one, that was the
• 6:50
  Speaker 3: first time in a long time we'd seen.
• 6:52
  Speaker 2: Inflation about it spiked, it went up fast.
• 6:56
  Speaker 3: The wisdom if you knew nothing else and just saw
• 7:00
  Speaker 3: inflation going up, typically you'd say, oh, okay, the federal
• 7:03
  Speaker 3: reserves got to step in.
• 7:04
  Speaker 2: They got to raise interest rates.
• 7:05
  Speaker 3: And in the past, when the Fed has done that,
• 7:08
  Speaker 3: it ends up in a bad place, right Like, it's
• 7:10
  Speaker 3: hard to do that. What I had, the point I
• 7:14
  Speaker 3: had made the entire time, was that most of that
• 7:16
  Speaker 3: inflation was coming from disruptions from COVID. And as we
• 7:20
  Speaker 3: went into twenty twenty two. There were also disruptions from
• 7:23
  Speaker 3: Putin invading Ukraine. That's not demand, that's not what interest
• 7:27
  Speaker 3: rates solve. J Powell did not unload the docks in
• 7:31
  Speaker 3: la he didn't take a second job, he didn't give
• 7:34
  Speaker 3: the vaccine out. These are all things that needed to
• 7:37
  Speaker 3: happen to get inflation down.
• 7:39
  Speaker 2: It has been so slow to get back on track.
• 7:42
  Speaker 3: And yet twenty twenty three, which we were told was impossible,
• 7:47
  Speaker 3: massive declines in inflation, unemployment at its lowest in you know,
• 7:52
  Speaker 3: since the nineteen sixties. That shouldn't have happened, and yet
• 7:55
  Speaker 3: it made perfect sense if you thought about, Hey, there
• 7:58
  Speaker 3: was a pandemic.
• 7:59
  Speaker 2: Hey there was a war in Europe.
• 8:01
  Speaker 3: So that's what has worked out, and that's what puts
• 8:04
  Speaker 3: us on a path to the elusive soft landing.
• 8:07
  Speaker 1: So, to paraphrase James Carvill, it's the pandemic stupid. Huh.
• 8:13
  Speaker 1: So what other periods are there in history that are
• 8:16
  Speaker 1: kind of comparable to what we've experienced over the past
• 8:20
  Speaker 1: year or two where there are all these recession warnings
• 8:23
  Speaker 1: and yet no recession.
• 8:26
  Speaker 3: Recessions aren't supposed to be forecastable, So for two years
• 8:31
  Speaker 3: to have recession calls so loud has been a little
• 8:37
  Speaker 3: mind blowing, right, Like, we're not supposed to know when
• 8:40
  Speaker 3: these are coming, and we're certainly not supposed to be
• 8:44
  Speaker 3: so certain about it. You'd have to go it's like
• 8:48
  Speaker 3: outside of living memory to find episodes of inflation, like
• 8:52
  Speaker 3: what we're seeing after the two World Wars, after the pandemic.
• 8:58
  Speaker 3: I mean, these are places we don't have very good
• 9:00
  Speaker 3: data in terms, and we obviously don't have experience with them.
• 9:04
  Speaker 3: So to gravitate back to the nineteen seventies, the vulgar fed,
• 9:09
  Speaker 3: you know, the early eighties, it makes sense why that's
• 9:12
  Speaker 3: where people go, because that's where we have data, that's
• 9:14
  Speaker 3: where we studied.
• 9:15
  Speaker 2: But like that's not what This.
• 9:17
  Speaker 1: Is very different world in the seventies and today. So
• 9:20
  Speaker 1: you mentioned we don't have a giant data set. What
• 9:23
  Speaker 1: if we had seventeen recessions in the past century and change.
• 9:28
  Speaker 1: Given that we can't be generally confident about recession forecasts,
• 9:33
  Speaker 1: how confident should we be in the sam rule You
• 9:36
  Speaker 1: actually had discussed, Hey, maybe it's not going to be
• 9:39
  Speaker 1: right this time.
• 9:40
  Speaker 3: Absolutely, if the sawmo we're going to break, it would
• 9:44
  Speaker 3: be this time and break in the sense that we
• 9:46
  Speaker 3: could hit that half a percentage point trigger, and then
• 9:50
  Speaker 3: the unemployment rate doesn't really rise that much more. We
• 9:53
  Speaker 3: don't go into recession. Typically after the sawwar triggers, you
• 9:57
  Speaker 3: have almost a four percentage point increase in unemployment relative
• 10:01
  Speaker 3: to the low two thousand and one that was the smallest,
• 10:04
  Speaker 3: and it was even still two percentage points, so it
• 10:07
  Speaker 3: would be very not usual for you to get up
• 10:11
  Speaker 3: to four percent, which we kind of have to hang
• 10:13
  Speaker 3: around four percent for a while to have it trigger
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  Speaker 3: and then just kind of hang there and maybe come
• 10:18
  Speaker 3: back down later. There's a very good case for why
• 10:21
  Speaker 3: this could happen. It goes back to these disruptions of COVID.
• 10:24
  Speaker 3: We know it's taken the labor market time to heal too.
• 10:28
  Speaker 3: We had all these labor shortages. We need to bring
• 10:30
  Speaker 3: people back in. Millions of people walked away from jobs
• 10:33
  Speaker 3: because of caregiving because they didn't want to die, and
• 10:36
  Speaker 3: we stopped processing immigrant work visas. So these things are happening.
• 10:41
  Speaker 3: There's this kind of catch up now. Now it's like
• 10:44
  Speaker 3: there's more people and the jobs have to catch up,
• 10:46
  Speaker 3: versus in the labor shortage it was the other way around.
• 10:49
  Speaker 3: That just can make things really messy, and again if
• 10:53
  Speaker 3: the summer we're ever going to break, it's this time.
• 10:55
  Speaker 3: And frankly, we have seen relationships breaking left and right,
• 10:58
  Speaker 3: so I would in good company.
• 11:01
  Speaker 1: So let's talk about the things that have broken in
• 11:04
  Speaker 1: the post pandemic era. We've seen shortages of single family homes,
• 11:09
  Speaker 1: we've seen shortages of semiconductors. Is still a long way
• 11:13
  Speaker 1: to get a new automobile, and it appears that we're
• 11:17
  Speaker 1: still dealing with a labor shortage. How many more workers
• 11:22
  Speaker 1: does this country need to reduce some of the tightness
• 11:26
  Speaker 1: in the labor market.
• 11:28
  Speaker 3: We started to make a good bit of progress in
• 11:31
  Speaker 3: the second half of last year in terms of getting
• 11:34
  Speaker 3: workers back and in some cases even better than before.
• 11:39
  Speaker 3: Women's prime age employment is at record highs, the percent
• 11:46
  Speaker 3: of workers with disabilities who have jobs record high, and
• 11:50
  Speaker 3: even some very marginalized groups, like black men, their labor
• 11:54
  Speaker 3: force participation has looked great. The black unemployment rate has
• 11:57
  Speaker 3: been low. We need these groups to come in not
• 12:02
  Speaker 3: just to make up the whole that the pandemic created,
• 12:06
  Speaker 3: but to keep it going. In terms of the labor
• 12:09
  Speaker 3: market is really strong right now, and that's a good thing,
• 12:11
  Speaker 3: and it's one that we need to build on. Because,
• 12:15
  Speaker 3: as you said, like, there's still a need for talent
• 12:18
  Speaker 3: and productivity, and that was the big kind of under
• 12:22
  Speaker 3: the hood story of last year.
• 12:24
  Speaker 1: So I want to leave investors with a little bit
• 12:27
  Speaker 1: of advice from the creator of the some rule. Tell
• 12:31
  Speaker 1: people what they should be looking for if they really
• 12:34
  Speaker 1: want to have the best way of anticipating a potential recession.
• 12:39
  Speaker 3: Keep your eyes on the labor market. The labor market
• 12:42
  Speaker 3: is so essential to American consumers. Like your paycheck, that's
• 12:48
  Speaker 3: what you spend. So if we lose the labor market,
• 12:50
  Speaker 3: we lose consumers. If we lose consumers, we're done.
• 12:53
  Speaker 1: And that's how we get a recession and typically a
• 12:57
  Speaker 1: week stock market. So to wrap up, investors who are
• 13:03
  Speaker 1: concerned about all these recession calls we've been hearing about
• 13:06
  Speaker 1: for the past two years should just ignore them. And
• 13:10
  Speaker 1: if you really want to know when a recession is coming,
• 13:15
  Speaker 1: keep your eye on the unemployment rate. When the three
• 13:18
  Speaker 1: month moving average ticks up zero point five to zero
• 13:21
  Speaker 1: of a percentage point relative to its previous twelve month low,
• 13:27
  Speaker 1: that's a warning sign. Get ready for a possible recession.
• 13:31
  Speaker 1: I'm Barry Ritolts and this is Bloomberg's at the month.
• 13:35
  Speaker 2: Oh, you got your things today.