By the time a recession is officially underway, there is often little investors and policymakers can do about it
BY ALMOST any measure, America’s economy is in fine fettle. GDP growth is robust. Unemployment is nearing a 50-year low. And the stockmarket is up by a whopping 50% since 2016. Yet, for all the positive economic news, there is no shortage of hand-wringing on Wall Street about a looming recession.
One new clue comes from a new book by Claudia Sahm, an economist at the Federal Reserve, who has developed a new method for predicting economic downturns. In “Recession Ready: Fiscal Policies to Stabilize the American Economy”, Ms Sahm argues that when the three-month average unemployment rate is at least 0.5 percentage points above its minimum from the previous 12 months, the economy is in a recession.
Ms Sahm’s measure has some advantages over its peers. It shows clear delineations between periods of recession and growth. It also appears to detect few, if any, false positives. Where her recession indicator falls short is on timeliness. After all, the ability to anticipate a recession is far more useful than knowing when you are in one. The yield curve predicted both the 2001 and 2008 recessions about a year in advance, and the R-word index ticked up at about the same time.
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