Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Hey, Sarah, Hi, David.
Speaker 3: So, I've noticed that there's one name that's been coming
Speaker 3: up over and over again. It's been all over TV
Speaker 3: the last couple of weeks.
Speaker 2: Kamala Harris, no, Donald Trump, no, Tim walltz jd Vance.
Speaker 3: Okay, I should clarify. There's one name we've been hearing
Speaker 3: over and over on Bloomberg TV.
Speaker 2: Claudia s. Claudia Sam so called Psalm rule.
Speaker 4: That Psalm rule, The Psalm rule has been triggered.
Speaker 2: Right Claudia Sam inventor of the Psalm rule Bingo. She's
Speaker 2: the chief economist at New Century Advisors and also a
Speaker 2: columnist here a Bloomberg Right, the.
Speaker 3: Psalm rule, it's everywhere, and I know it's considered to
Speaker 3: be one of the most accurate recession predictors around. It's
Speaker 3: about jobs, right.
Speaker 2: It is. And the Som rule states, checking my notes here,
Speaker 2: if the unemployment rate rises more than half a percentage
Speaker 2: point within a one year period, the US is in
Speaker 2: a recession.
Speaker 3: Right, And some said the jobs data from July triggered
Speaker 3: the rule. So, David, does that mean it's happening? A
Speaker 3: recession is coming?
Speaker 2: I'm so glad you were asking these questions, Sarah, because
Speaker 2: today we are introducing a collaboration with Bloomberg.
Speaker 3: Explains Thank God, I need that.
Speaker 2: Same here every now and then we're going to break
Speaker 2: down the biggest parts of the economy and our financial system.
Speaker 3: We'll take a look at how they came to be
Speaker 3: and what they mean for all of us. I promise
Speaker 3: there's something here for everyone, even if you're already an economist.
Speaker 2: So today, on the Big Take, we hear from Claudia
Speaker 2: Sam herself about what it means that her rule has
Speaker 2: been triggered and how some feels about all the Psalm
Speaker 2: rule mania.
Speaker 1: Since it became popular, it's gotten used and abused, and it,
Speaker 1: you know, acually had a different name that didn't involve
Speaker 1: my name.
Speaker 3: Wait, Claudia som wish as we didn't call it the
Speaker 3: Psalm rule, she does.
Speaker 2: Wow. I'm Sarah Holder, I'm David Gera, and this is
Speaker 2: the Big Take from Bloomberg News with the Psalm Rule explained.
Speaker 2: In the last few months, Claudia Sam has become one
Speaker 2: of the best known economists in the world thanks to
Speaker 2: the research she's done on recessions. But Claudia says she
Speaker 2: didn't set out to become one of the leading lights
Speaker 2: of the dismal science, someone who is the namesake of
Speaker 2: a widely cited rule in economics.
Speaker 1: So I grew up in the Midwest on hog farm.
Speaker 1: I never dreamed that I would be an economist. I
Speaker 1: didn't actually know what an economist was before I went
Speaker 1: to college.
Speaker 2: It was on that family farm that Claudia learned a
Speaker 2: lot about work, years before she ever heard of a
Speaker 2: jobs report.
Speaker 1: There was one summer we had to work outside all
Speaker 1: summer doing you know, nothing complicated, but really like grunt work,
Speaker 1: which essentially meant shoveling hog manure all summer. And you know,
Speaker 1: that was unpleasant. And also at the end they said, well,
Speaker 1: you know this is hard work. No matter what you
Speaker 1: do going for it. You don't look down at anybody.
Speaker 2: Right, Claudia says she took that to heart, along with
Speaker 2: something else her mom and dad told her and her siblings.
Speaker 1: We had this choice of well, you go do really
Speaker 1: well in school, or you're.
Speaker 2: Going to go out and do more with automneur Claudia
Speaker 2: studied hard. She went to Dennison University, a liberal arts
Speaker 2: school in central Ohio, and it was there Claudia discovered economics.
Speaker 2: What she liked about it, she says, is it could
Speaker 2: be practical.
Speaker 1: I see problems out there in the world and to
Speaker 1: have some tools to chip away at them. Is that
Speaker 1: that had the appeal.
Speaker 2: After college and graduate school at the University of Michigan,
Speaker 2: Claudia got a job as an economist at the Federal
Speaker 2: Reserve in Washington. It was just a few months before
Speaker 2: bear Stearns collapsed.
Speaker 1: My first year as a professional forecaster was two thousand
Speaker 1: and eight. It was an absolute birth by fire. Is
Speaker 1: a you know, being new to the profession, learning what
Speaker 1: I'm doing, and then just watching could fall.
Speaker 2: Apart, banks going busts, the housing market collapsing, and a recession.
Speaker 2: Claudia says she had a big realization, one that would
Speaker 2: inspire her work on what became the Psalm Rule. She
Speaker 2: started to focus her research on what the government can
Speaker 2: and should do when there's a deep economic downturn and
Speaker 2: what kind of aid is the most effective.
Speaker 1: Because the Fed, when it does monetary policy, works around
Speaker 1: the edges, right, they need to have a sense of
Speaker 1: what they think Congress is the effects of policies from
Speaker 1: Congress will do, and that I guess you know, that
Speaker 1: experience really radicalized me to the idea that we have
Speaker 1: to have better fiscal policy.
Speaker 2: One of her main takeaways, Claudia says, is that aid
Speaker 2: needs to get to people faster. She recognized that the
Speaker 2: sooner it was distributed, the better the odds small businesses
Speaker 2: could stay open and that people could stay in their
Speaker 2: homes and keep their jobs.
Speaker 1: I wanted an early warning, early stages of it's a recession.
Speaker 1: Things are going south, that momentum is there, let's and help.
Speaker 2: Fresh out of grad school, Claudia had found what she
Speaker 2: wanted to focus on, and about a decade later, she
Speaker 2: was asked to participate in a big project put together
Speaker 2: by two think tanks.
Speaker 1: And there were several contributors, several economists experts like myself,
Speaker 1: who had proposals of fiscal policy that could be used
Speaker 1: to fight future recessions.
Speaker 2: Claudia's contribution was a paper on direct stimulus payments to individuals,
Speaker 2: and as she was doing the research that underpinned it,
Speaker 2: Claudia reflected on something she'd noticed during her time at
Speaker 2: the FED, going back to the global financial crisis. Her
Speaker 2: colleagues used data, but they also relied on intuition I have.
Speaker 1: Been around and absorbed a lot from people who were
Speaker 1: making those kind of decisions, like what are the rules
Speaker 1: of some the good professional macro forecasters do like real
Speaker 1: world down in the trenches. So something that I had
Speaker 1: picked up is small increases in the unemployment rate or
Speaker 1: bad news.
Speaker 3: Right?
Speaker 2: Can you describe, like what your aha moment was like
Speaker 2: when you kind of recognized that there was in fact
Speaker 2: this rule. Was there a big aha moment for you?
Speaker 1: No, there's just a very tortured Excel spreadsheet.
Speaker 2: Claudia looked at all the economic downturns since World War Two.
Speaker 2: She dug into the jobs data, specifically focusing on the
Speaker 2: unemployment rate, and started looking for a pattern, a common
Speaker 2: set of circumstances that preceded each recession.
Speaker 1: Basically, I took an intuition, a rule, a principle, and
Speaker 1: I sat down and said, Okay, let's let's make this
Speaker 1: as accurate as possible. Let's try different variations. There is
Speaker 1: nothing about the formula that is special. So we're looking
Speaker 1: at this change over a relatively short period of time
Speaker 1: in a year, and if that change is a half
Speaker 1: a percentage point or more, that is consistent and with
Speaker 1: the early stages of a recession in US.
Speaker 2: Claudia found that if the unemployment rate increases by half
Speaker 2: a percentage point or more, that's a sign the US
Speaker 2: is in a recession.
Speaker 1: If you start in nineteen seventy in the data that
Speaker 1: were published at the time, so the real time data,
Speaker 1: it has a perfect record. It gets really close in
Speaker 1: seventy six to a false positive, but as a very
Speaker 1: good record. And if you go back before that, it
Speaker 1: has a very good record. There are two you know,
Speaker 1: quote what false positives it turns on outside of recession.
Speaker 1: In the two cases that are in that in the
Speaker 1: historical record, in sixty nine and fifty nine, a recession
Speaker 1: followed within six months.
Speaker 2: Now, remember what Claudia really cared about, what motivated her
Speaker 2: research is how government should respond to recessions the sam rule.
Speaker 2: What she discovered about how that increase in unemployment preceded
Speaker 2: pass to other downturns. That was only part of what
Speaker 2: ended up being a twenty six page paper.
Speaker 1: So in my chapter, which was about automatic direct payments
Speaker 1: that would go out early in recessions to individuals, get
Speaker 1: them on autopilot. Congress agrees ahead of time conditions get bad,
Speaker 1: the checks go out the SAM rule was, and it wasn't.
Speaker 1: It really doesn't look like much. It's like a complete
Speaker 1: supporting actress to this plot here is that it was
Speaker 1: what tells you turn it on when to send the
Speaker 1: checks out.
Speaker 2: A few months later, the book is published and there's
Speaker 2: a big event in DC. I get together with all
Speaker 2: the authors.
Speaker 4: Good afternoon, welcome you on behalf of my colleagues at
Speaker 4: the Hamilton Project as we engage in today's forum preparing
Speaker 4: for the next recession policies.
Speaker 1: So I go to the event. I mean, I was
Speaker 1: supposed to be one of the panels. I'm sending there
Speaker 1: waiting and have all these luminaries.
Speaker 2: We're extremely lucky. Chaperanankee was head of the Federal Reserve
Speaker 2: from two thousand and six.
Speaker 1: Christina Roma is to University of California.
Speaker 4: Buckley was.
Speaker 1: I'm excited about the event, and in one of the
Speaker 1: first panels, they start the SAM rule.
Speaker 2: If a recession occurs and the Psalm rule is implemented again.
Speaker 3: When the Psalm rule triggers, we'll be talking I think
Speaker 3: for years to come about the PSAM rule.
Speaker 1: And I'm just like, what is happening? I was mortified. Yeah,
Speaker 1: I honored and embarrassed that this is getting called the
Speaker 1: Sam rule.
Speaker 2: And just like that, in twenty nineteen, the Psalm rule
Speaker 2: was born, and since then.
Speaker 1: It certainly has it's taken on a life of its own.
Speaker 2: After the break, Claudia Sam explains why she thinks her
Speaker 2: rule has been used and abused and why she wishes
Speaker 2: it had a different name. So, just to recap, the
Speaker 2: Psalm rule came out of research economists Claudia Sam was
Speaker 2: doing and too when the government should start helping people
Speaker 2: during an economic downturn, like sending out stimulus checks. The
Speaker 2: key is Claudia wanted it to be automatic. If there
Speaker 2: were a rule and it's triggered, help would go out
Speaker 2: and recessions hopefully wouldn't be as painful.
Speaker 1: I was trying to diagnose a situation.
Speaker 2: But that is lost on a lot of people. And
Speaker 2: since the Psalm rule was introduced in twenty nineteen, it's
Speaker 2: become widely cited. We've heard it mentioned by FED policymakers
Speaker 2: and by lawmakers, and it's been all over the news.
Speaker 2: It's been one of Google's top trending searches. But Claudia
Speaker 2: says that is not necessarily a good thing.
Speaker 1: It's been a little rough in a little surreal being
Speaker 1: in the middle of it. It is very simple, and
Speaker 1: anything that simple is going to have, you know, it
Speaker 1: has its Achilles heel.
Speaker 2: An Achilles heel, Claudia says the Psalm rule has one
Speaker 2: big vulnerability. It can't account for all the different reasons
Speaker 2: there could be an increase in unemployment. Right.
Speaker 1: So the bad reason that u employment rate goes up
Speaker 1: is there's less demand for workers, right, and so that
Speaker 1: could you know, the typical though not the only way
Speaker 1: this gets expressed, people lose their jobs. So that demand
Speaker 1: story for workers is why this sum rule works.
Speaker 2: But Claudia notes the unemployment rate can go up because
Speaker 2: of something else.
Speaker 1: It has some temporary pain associated with it, but actually
Speaker 1: has a much more positive story, like it's dynamos are good.
Speaker 2: In this scenario, the unemployment rate goes up because there
Speaker 2: are more people joining the labor force. Maybe there's an
Speaker 2: uptick in immigration, which can ultimately be beneficial to the economy.
Speaker 1: So if you have particularly if you have kind of
Speaker 1: a burst of people coming in looking for work, well,
Speaker 1: then you can have a bump up in the unemployment rate. Now,
Speaker 1: as long as the jobs catch up, that unemployment rate
Speaker 1: will come back down, right, and then you've got more workers.
Speaker 1: So now you've got an economy that's even got a
Speaker 1: better chance of expanding like it's it's the very opposite
Speaker 1: direction of the downward spiral of a recession.
Speaker 2: And this is partly what Claudia thinks is happening right now.
Speaker 2: The unemployment rate is going up and economic activity is
Speaker 2: slowing in the US, which has triggered the Psalm rule
Speaker 2: and led to a lot of hand ringing. But Claudia says.
Speaker 1: I think it's wrong about where we are right now.
Speaker 1: I do not think the US economy is in a recession.
Speaker 2: She's noticed people invoking the Psalm rule for their own reasons,
Speaker 2: either to put pressure on the Federal Reserve to cut
Speaker 2: rates or to suggest that the Psalm rule is broken.
Speaker 2: But Claudia says the dynamics of the economy have changed
Speaker 2: so much since the pandemic that it's not a surprise
Speaker 2: to her that her rule might not be working in
Speaker 2: this scenario.
Speaker 1: In the past four and a half years since the
Speaker 1: pandemic began, we have lived through a period of extreme
Speaker 1: It has just been confusing. Like the patterns, if this
Speaker 1: Psalm rule, we're ever going to break. It would be
Speaker 1: now because not only are we having changes, say in supply,
Speaker 1: we're having we had some big ones, and that just
Speaker 1: really puts stress on our typical We think about the
Speaker 1: boom and the bust and demand.
Speaker 2: And it's not just the Psalm rule that's having problems
Speaker 2: given the uniqueness of the economy post pandemic.
Speaker 1: So the sum rule is actually one of a whole
Speaker 1: series of our kind of tools that have you know,
Speaker 1: had a rough time. Does that mean that the tools
Speaker 1: should be ignored or thrown aside, No, it just means
Speaker 1: you should be really careful with them. And I I
Speaker 1: tried to be careful with these tools always, right, I don't.
Speaker 1: I would never just look at one rule, even I
Speaker 1: have my name on it. In trying to give advice
Speaker 1: on the economy in terms of big.
Speaker 2: Picture, Claudia says that in the big picture, even if
Speaker 2: the US economy isn't in a recession, there are warning
Speaker 2: signs we.
Speaker 1: Might not be in a bad place right now, but
Speaker 1: the direction is not good. So then it's like, well,
Speaker 1: you know, all is not lost. There are things to do.
Speaker 1: But I think, you know, first it's recognizing diagnosing the
Speaker 1: problem appropriately, and then figuring out what's But yeah, so
Speaker 1: my take on this Som rule is it is there
Speaker 1: is a message there. There is something that we need
Speaker 1: to be paying close attention.
Speaker 2: To, which is part of what the Psalm rule is
Speaker 2: supposed to do. Remember, Claudia wanted it to be a
Speaker 2: diagnostic to help solve the problem of waiting too long
Speaker 2: to help people during recessions, and solving problems was what
Speaker 2: appealed to Claudia about economics in the first place.
Speaker 1: The Sam rule was never meant to trigger and then
Speaker 1: cause panic. I just I wanted an early warning, early
Speaker 1: stages of it's a recession, things are going south, that
Speaker 1: momentum is there, let's step in end help and from
Speaker 1: the beginning, and I continue, I'm probably even more so.
Speaker 1: I'm like, there's a better rule out there, and I
Speaker 1: will be thrilled when I see the person that hasn't.
Speaker 2: This is the big take from Bloomberg News. I'm David Gera.
Speaker 2: This episode was a collaboration with our newsroom friends called
Speaker 2: Bloomberg Explains Hard to Explain Topics explained Simply. It was
Speaker 2: produced by Andreana Tapia and Alex Sagura, who also mixed
Speaker 2: the episode. It was edited by Stacy Vanick Smith and
Speaker 2: it was fact checked by Thomas loom Our senior producers
Speaker 2: are Kim Gettleson and Naomi Shaven. Our senior editor is
Speaker 2: Elizabeth Ponso. Our executive producer is Nicole beemster Boor. Sage
Speaker 2: Bauman is head of Podcasts. Thanks for listening, we'll be
Speaker 2: back tomorrow