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