Sahm’s Recession Indicator Flashes, But No Downturn Yet
Economist Claudia Sahm’s recession indicator, known as the Sahm Rule, has signaled a possible recession. However, Sahm believes this doesn’t mean the U.S. is currently in a downturn.
Sahm Rule Explained
The Sahm Rule indicates a recession when the three-month average unemployment rate rises by at least 0.5% from its 12-month low. This occurred in July, but Sahm argues this alone is too simplistic in the current post-pandemic economy.
Positive Growth Outlook
According to Sahm, the U.S. is not in a recession, nor close to one. She expects GDP to grow around 3% for a second consecutive quarter, based on stronger-than-expected economic performance between April and June. A similar outcome is likely in the third quarter.
Fed’s Actions and Concerns
The Federal Reserve cut interest rates by 0.5% last week. While Sahm acknowledges this is significant, she believes the rate cuts are meant to prevent a recession, not address an existing one.
Economist David Rosenberg, however, believes the Fed’s actions are an admission that monetary policy was overly tight. He suggests that the rate cut might delay but won’t prevent a recession. Analysts at JPMorgan estimate a 35% chance of a recession in 2024, increasing to 45% by the end of the year.
Manufacturing Sector Struggles
Despite avoiding a technical recession, some sectors continue to struggle. The Institute for Supply Management (ISM) reported that domestic manufacturing has been in contraction for at least five months, with its PMI below 50. ISM’s Timothy Fiore pointed out that companies are hesitant to invest due to high interest rates and election uncertainty.
