A few days ago Claudia Sahm wrote a Bloomberg column entitled:
My Recession Rule Was Meant to Be Broken
Even before I read the article, I suspected that I would sympathize with her argument, which proved to be the case:
The US is not in a recession, despite the indicator bearing my name saying that it is. The Sahm rule, which was triggered with Friday’s weaker-than-expected jobs report, joins a long list of economic tools skewed by the unusual disruptions of the past four and a half years.
That said — and I say this with a mixture of humility and concern — the Sahm rule is still relevant. The risk of a recession is elevated, strengthening the case for the US Federal Reserve to cut interest rates. . . .
But conditions can change quickly, and by the time the NBER has officially designated a recession, it is usually too late to guide policymakers. The purpose of the Sahm rule is to act as a kind of early diagnosis.
I frequently argue that recessions are almost unforecastable, because if there were a reliable technique for forecasting a (demand-side) slump, the Fed would move to try to prevent this from occurring. I’ve previously suggested that the lack of mini-recessions in the US is evidence that the Fed often reacts too slowly to the onset of recession.
Sahm sees her rule not so much as an unconditional forecasting technique, rather as a guide to help policymakers improve on stabilization policy. As an analogy, the beep your car makes backing up near an object is not supposed to predict an accident, it’s supposed to prevent an accident.
It seems to me that Sahm strikes exactly the right note—that her rule should be viewed as useful, not infallible. The recent triggering of the Sahm’s Rule suggests that the risk of recession is substantially elevated and that policymakers need to take this information into account.
The economics/finance community is full of people with big egos. I often hear people brag about how they have been correct time after time, which tends to make me take their views less seriously. At times, it almost seems like they care more about their reputation than about the health of the economy. Sahm seems to understand that if her rule ends up preventing a recession, it would be a vastly greater achievement than if it ends up predicting a recession. Let’s hope that this time her rule fails, and she succeeds.