Is the Economy Already in a Recession? Find Out Now!

Is the US economy heading towards a recession? Pascal Michaillat from UCSC and Emmanuel Saez from UC Berkeley suggest there is a 40% probability that it may be true. Their research introduces a new recession indicator, similar to the Sahm rule but more efficient in detecting economic downturns. Here’s a breakdown of their findings:

The New Indicator:
The researchers developed a novel recession indicator by amalgamating vacancy and unemployment data. This indicator is a combination of the Sahm indicator, based on the unemployment rate, and a similar one utilizing the vacancy rate.
The Two-Sided Rule:
Their proposed two-sided recession rule states that when the indicator reaches 0.3pp, a recession may have begun, and when it hits 0.8pp, a recession has definitely started. This rule detects recessions earlier than the traditional Sahm rule, by an average of 1.4 months.
Historical Performance:
The new indicator has a remarkable historical accuracy, perfectly identifying all recessions since 1930. In contrast, the Sahm rule fails to do so before 1960.

Based on the latest data from July 2024, the indicator stands at 0.5pp, indicating a 40% chance of the US economy being in recession, possibly since March 2024.

One aspect to consider is whether the results hold with real-time data, considering the impact of population controls on recent trends.

Alternative Indicators:
Additional indicators like nonfarm payroll employment, industrial production, and retail sales provide a broader perspective on the economic landscape. These indicators give a more comprehensive view of the current economic situation and potential recessionary trends.

Revisions and Risks:
It’s important to note that all these indicators are subject to revisions, with GDP being the most vulnerable series. This is why the National Bureau of Economic Research’s Business Cycle Dating Committee doesn’t heavily rely on GDP as a primary indicator.

In conclusion, the US economy stands at a critical juncture, with signals pointing towards a possible recession. Understanding and monitoring these indicators are crucial for policymakers and investors to navigate the uncertain economic landscape effectively. Stay informed, stay prepared, and be proactive in responding to potential economic downturns.