Notable indicator suggests potential recession for America in the near future

The ideal situation for financial markets would be to have a reliable leading indicator that is easy to track and regularly provides an accurate forecast of what lies ahead. Unfortunately, this perfect indicator is not attainable. Even understanding what is happening in the current moment can be a challenge, nevermind the future. If this ideal indicator did exist, it would be like a magical goblet of information that investors and analysts could draw from. Recently, they have put their focus on the Sahm rule, which appears to be a promising option.

 Claudia Sahm, a former economist at the Federal Reserve, developed the Sahm rule in 2019. This rule has the potential to detect recessions since 1960 in their early stages, with no false positives. This is noteworthy since the organization responsible for officially declaring whether the US economy is in a recession usually requires a full year of data. The Sahm rule, however, usually needs just several months. An image from The Economist is depicted, showing the width of 1424 and quality of 80 with an automatic format.

 The Sahm indicator states that when the unemployment rate rises by half a percentage point from its lowest point in the last year, the economy is in a recession. This figure is calculated as a three-month rolling average, and it currently stands at 0.33 percentage points. If the rate rises to 4.0% and 4.1% in the upcoming months, it will reach the half-point mark, and thus signify a recession.

 In actuality, Ms. Sahm is quick to clarify that her rule portrays an observable trend, not a law that must be abided by. Furthermore, the post-pandemic economy could have generated the precise conditions that conflict with this trend. In periods of recession, employers tend to fire staff, and the job losses are generally more extensive than the half-point line indicated by Sahm's rule.

 This time, the rise in unemployment appears to be caused not necessarily by shrinking demand for employees, but instead by the growing supply of them. The American labour force, comprising those with jobs and those who are looking for them, has grown by almost 3 million, or 1.7%, since the end of 2019. Meanwhile, job numbers have increased by approximately 2 million, at 1.2%. According to Ms Sahm, "If workers return and job numbers have yet to catch up, the jobless rate can rise. However, when job availability starts to reach the same level as the workforce, the unemployment rate will not skyrocket."

 For Ms Sahm, the unexpected notoriety of her measure has created an additional complication. She has found herself having to come to terms with how the world has taken her concept in a completely different direction from her initial goal. Ms Sahm was not aiming to become involved in the prediction business, nor in timing fiscal markets. Instead, her aspiration was to generate a baseline for initiating automatic payments to individuals to safeguard them from an economic downturn. "I've had a lot of people asking me if a recession is impending," she states. "Not many are inquiring as to what policymakers can do about it."

 Given the current legislative standstill, it is highly unlikely that policymakers will be able to do anything to address a possible rise in unemployment in the coming months. As a result, Ms Sahm finds herself in an unenviable position - wishing for the economy to remain stable and avoid a recession, yet still following her own advice.