New Recession Indicator Issues Warning: The possibility of a recession in the US is around 40%!
California economists have proposed a new indicator, predicting a 40% chance of a US economic recession, with a warning possibly starting in March of this year. The indicator is based on the changes in the three-month average unemployment rate and job vacancy rate, aiming to detect a recession earlier and more accurately. Despite the inverted yield curve persisting for two years, the economy has not yet entered a recession, raising doubts about the reliability of traditional indicators. In addition, former Federal Reserve economist Sam also expressed doubts about the effectiveness of this rule
Economists in California have proposed a new indicator, claiming that it can detect economic recessions faster and more reliably. According to the latest data from the US Department of Labor in July, this new indicator shows that the possibility of the US economy entering a recession is about 40%, potentially starting as early as March this year.
Pascal Michaillat, Associate Professor of Economics at the University of California, Santa Cruz, and Emmanuel Saez, Professor at the University of California, Berkeley, introduced this new rule in a paper published earlier this month.
This new rule adopts a methodology similar to the "Sam Rule", developed by former Federal Reserve economist Sam, which relies on changes in the unemployment rate to predict economic recessions months in advance. However, the new rule has several important differences.
After several months, the Sam Rule was finally triggered in July, when the three-month average unemployment rate rose by 50 basis points from the lowest value in the past 12 months.
Like the Sam Rule, the new rule also relies on changes in the three-month average unemployment rate, but it also incorporates changes in the job vacancy rate. The authors believe this allows the new rule to lower the detection threshold while filtering out false alarms.
Another important difference is that, unlike the Sam Rule, the new rule sets a minimum threshold, beyond which the likelihood of a recession increases; there is also a maximum threshold, beyond which a recession is almost certain to have begun.
This new rule was proposed when investors questioned the reliability of certain long-standing indicators that seemed to have become ineffective in the post-pandemic era.
The yield curve inversion has persisted for over two years (short-term Treasury yields higher than long-term Treasury yields), but the US economy has not entered a recession. The yield curve inversion was once seen as a clear indicator of an impending recession.
The yield curve briefly returned to normal recently, but by Monday, the yield curve inverted again, with the two-year Treasury yield higher than the ten-year Treasury yield.
Even Sam herself has questioned the accuracy of the rule named after her, stating that she does not believe the economy has entered a recession. Instead, she pointed out distortions in labor supply in the post-pandemic period and a recent surge in immigration numbers that may have weakened the effectiveness of her rule