How do we know if a recession has started? Sometimes it’s obvious. In March 2020 during the pandemic emergency, weekly applications for unemployment insurance jumped from 200,000 to 6 million. There was no doubt we were in a recession.
More often, it’s hard to know if a recession has begun. Economic indicators like employment, income and sales often will decline for a month or two while the economy grows. For example, during the long 129 month expansion in the 20-teens, retail sales adjusted for inflation decreased 43 times. Ten times sales decreased 2 months in a row. The expansion rolled merrily along. Perhaps we should look for 3 straight months of decline. During the Great Recession from December 2007 to June 2009 sales dropped 7 months in a row. There was no doubt we were in a recession. That means, though, we have to wait at least two months after the first downturn to even suspect that there’s a recession. If a recession began today, that would be November.
We might ask the National Bureau of Economic Research in Cambridge Massachusetts if they think a recession has started. The NBER is the unofficial umpire of recession beginnings and endings. They look at many economic indicators to see when they peaked and turned down, and then when the troughed and turned back up. Peak to trough marks a recession, which they define as a significant decline in economic activity spread across the economy.
But the NBER is mostly interested in marking peaks and troughs for research purposes, so they wait a long time before making a call. They announced the Great Recession’s December 2007 peak in December 2008, and the June 2009 trough in September 2010. Reporters like to make fun. “Breaking news! The recession ended a year-and-a-half ago.”
We can’t look for an announcement from the recession umpire. Perhaps we could play umpire ourselves, though, by looking at the indicators that the NBER uses. Have any of them peaked and are now declining? Yes. Retail sales adjusted for inflation peaked in September 2023, and have fallen in 5 of the 9 months since. Real manufacturing and trade sales peaked in December 2023, and have fallen in 3 of 5 months since. And total employment measured by a survey of people peaked in April this year. It’s fallen in one of the three months since. The drop in May was pretty big. Industrial production had its highest reading in June, and fell in July.
But real consumer spending, real income and payroll employment measured by a survey of businesses all continue to grow. Is this a significant decline spread across the economy? It’s too soon to tell.
There is an indicator that’s designed to mark recessions as they are beginning. It’s called the Sahm Rule, named for the economist who discovered it, Claudia Sahm. Take the average of the past three unemployment rates. Compare it to the lowest 3-month average in the year before that. If the current average is more than half-a-point higher, then a recession has begun. The rule flagged a recession in February 2008, only 2 months after the date the NBER eventually marked. In 11 recessions since 1953, the Sahm Rule called it after an average of two-and-a-half months. Only twice, in 1959 and in 2003, did the rule call a recession when there wasn’t one.
What does the Rule say now? The average unemployment rate over the past 3 months is 4.13 percent. The 3-month average low in the year before that was in May through July of 2023, 3.6 percent. The difference is 0.53 percent. That’s more than half-a-point. Oops.
The Rule says a recession has started. Sahm herself thinks we’re not in recession. The number of people entering the labor force but not yet employed is increasing, and unfilled job openings still exceed the number of people searching for work.
The rising unemployment rate is the result of the Federal Reserve’s efforts to battle inflation by raising interest rates. Fed Chair Jerome Powell says they’ll likely start cutting rates at the Fed’s September 18 meeting. If that works to stimulate the economy, perhaps the unemployment rate won’t rise much further, and the Sahm Rule will register its third miss.
