0:00

Investors don't love recessions.

0:02

Bad things happen when the economy contracts.

0:05

Top line corporate growth stops,

0:08

revenue and earnings fall. That

0:10

sends stock prices lower. Ever

0:13

since the pandemic ended, lots

0:16

of investors fearing a recession

0:18

was imminent have gotten scared out

0:20

of equity markets that any

0:23

day now recession still hasn't

0:25

shown up. This is despite

0:27

the prediction of many well

0:30

known economists over the past two years,

0:32

there still has been no recession. As

0:35

it turns out, there are ways

0:37

investors can tell if an economic

0:40

contraction is really coming.

0:52

I'm Barry Results and on today's edition

0:54

of At the Money, we're going

0:56

to discuss how to accurately identify

0:59

in advance, in real time when

1:02

the economy is going into recession.

1:05

To help us unpack all of this and what it means

1:07

for your portfolio, let's bring

1:09

in Claudia Sam. She is a former

1:11

Federal Reserve economist and

1:14

creator of what has become known

1:16

as the Sam Rule. Claudia,

1:19

welcome to Bloomberg's At the Money.

1:21

Happy to be here.

1:22

So let's start with the basics. Tell us what

1:24

happens to the economy during

1:27

a recession.

1:28

A recession is a broad based

1:31

contraction and economic activity.

1:33

So it's not about one industry, it's not about

1:35

one part of the country. It hits all

1:37

of us, and a recession hits hard.

1:40

It's and that's why we want

1:43

to fight them. That's why we want to know if they're coming.

1:45

So that obviously is not great.

1:47

How long and deep are the typical

1:50

recessions.

1:51

It varies. It depends on what happened.

1:54

The global financial crisis in

1:56

two thousand and eight, that was a

1:58

big, fast de recession

2:01

that was very bad. Two thousand and one, the

2:03

bursting of the dot com bubble, that's one

2:05

of the mildest recessions that we've seen

2:08

in a very long time. So

2:10

it depends on what hits us as to how

2:12

hard we go down.

2:15

Really interesting, it's funny you mentioned one because

2:18

the year before and the year after two thousand

2:20

and two thousand and two was one of those

2:22

rare years where the stock market was

2:24

down even though there wasn't a recession. Surprisingly,

2:28

that was a fairly mild recession. Where

2:30

did the two thousand and one recession show

2:33

up in the data?

2:35

In two thousand and one, we saw the unemployment

2:37

rate rise, not as much as in

2:39

two thousand and eight or in twenty twenty, and

2:42

we did see GDP decline,

2:45

though it was not as

2:47

severe as we've seen in other recessions.

2:50

So you developed an indicator what

2:52

people call the Soalm rule, to

2:54

help us figure out in advance when

2:56

recessions are coming tell us about

2:59

it.

3:00

UM looks for relatively small

3:02

increases in the unemployment rate to say

3:04

we're in a recession. Specifically,

3:07

we look at the unemployment rate, the national unemployment

3:09

rate, take the three month average.

3:12

We don't want to get faked out by the bumps and wiggles.

3:14

We compare the most recent reading

3:16

to the lowest of these three month averages

3:19

over the prior twelve months. If that difference

3:22

is a half a percentage point or more, we

3:24

are in a recession.

3:26

So let me get a little more specific.

3:29

How timely is this indicator

3:32

when it goes offen what's its track

3:34

record been like.

3:35

It has a perfect track record since nineteen

3:37

seventies. It's never triggered outside

3:40

of a recession, and it's always triggered

3:42

early in one, far earlier

3:45

than we would have the official recession

3:48

dating by the National Beer of Economic Research,

3:51

and it's within the first

3:53

three four months of a recession.

3:55

And that also is before we would have the.

3:58

Two quarters of GDP that would typically

4:00

be used to say we're in a recession.

4:03

Although we've seen two negative quotas

4:05

of GDP where we haven't had recessions.

4:07

That's not an official indicator

4:10

anywhere.

4:10

It just seems to.

4:11

Be a rule of thumb that

4:13

some countries use, but we don't

4:15

really use that here in the United States. Right, we

4:17

have the NBER and all

4:20

of their many indicators that they track.

4:23

What's amazing, and so many

4:25

relationships have broken in this COVID

4:28

and the recovery that two

4:30

quarters of a decline in GDP that

4:33

always happens in a recession.

4:35

You've got to go back to nineteen.

4:36

Forty seven to find a time where

4:38

you have two quarters outside of a recession. So

4:41

that just shows one should be really careful

4:43

right now with the rules

4:45

of thumb that have worked in the past.

4:47

Right, you can find a good parallel between

4:49

the post war era and the post pandemic

4:51

era, giant fiscal stimulus, et cetera.

4:54

But let's stick with the some rule for

4:56

a moment. Most economic rules

4:59

that I'm familiar with, they're pretty

5:01

complex. They rely on a lot of moving

5:03

parts. The SAM rule seems fairly

5:05

simple. A single labor market indicator.

5:09

Is that oversimplifying the complexity

5:12

of the economy, or

5:14

do all roads in the economy lead

5:17

to the labor market?

5:18

This SAM rule is simple by design. Its

5:21

purpose was to say,

5:23

hey, Congress, send out the

5:25

stimulus checks and frankly, do

5:27

it automatically. Just tie it to the same rule.

5:30

That's why it exists. It's been used

5:32

for a lot of other purposes recently, and

5:35

so but I will say, there's a saying

5:37

among economists, if you had to be on a desert

5:39

island and you can only have one data series

5:41

to tell you what the US economy is doing, it's

5:44

the unemployment rate. Is

5:46

it tells us so much for a lot

5:49

of different reasons. It tells us so much about where

5:51

we are, and frankly, as you see

5:53

it start to drift up, it can tell us

5:55

where we're headed. It's not a perfect signal,

5:58

but it is something to say, Yeah, it's

6:01

even before the summ will with trigger you should

6:03

pay attention to it.

6:04

So let's talk a little bit about that. You know,

6:06

since since the pandemic

6:08

ended, it seems almost immediately

6:11

after the recovery began, we

6:13

began hearing about a recession. This

6:15

is already going on for two years. It's

6:18

imminent, it's about to happen. And

6:20

as that drum beat has gotten louder,

6:23

inflation has gone down, Unemployment

6:25

has fallen, consumer spending has remained

6:28

robust, even wage gains have gotten better.

6:30

If anything, the economy has improved.

6:33

Why this constant

6:35

drumbeat that a recession is imminent.

6:39

Many economists, many of my peers,

6:42

got stuck in the nineteen seventies, and

6:45

in the we've had inflation

6:47

went up, I mean legitimately in twenty twenty one,

6:49

that was the first time in a long time we'd seen.

6:52

Inflation about it spiked,

6:54

it went up fast.

6:56

The wisdom if

6:59

you knew nothing else and just saw inflation going

7:01

up, typically you'd say, oh, okay, the federal reserves

7:03

got to step in.

7:04

They got to raise interest rates.

7:05

And in the past, when the Fed has done that,

7:08

it ends up in a bad place, right Like, it's

7:10

hard to do that. What I

7:12

had, the point I had made the entire

7:15

time, was that most of that inflation

7:17

was coming from disruptions from

7:19

COVID. And as we went into twenty twenty

7:21

two. There were also disruptions from Putin

7:23

invading Ukraine. That's not demand,

7:26

that's not what interest rates solve.

7:29

J Powell did not unload the docks

7:31

in la he didn't take a second job,

7:33

he didn't give the vaccine out. These

7:35

are all things that needed to happen to get inflation

7:38

down.

7:39

It has been so slow to

7:41

get back on track.

7:42

And yet twenty twenty three, which

7:44

we were told was impossible, massive

7:47

declines in inflation, unemployment

7:50

at its lowest in you

7:52

know, since the nineteen sixties. That

7:54

shouldn't have happened, and yet it made perfect

7:56

sense if you thought about, Hey, there was a pandemic.

7:59

Hey there was a war in Europe.

8:01

So that's what has worked out, and that's

8:03

what puts us on a path to the elusive

8:06

soft landing.

8:07

So, to paraphrase James Carvill, it's

8:10

the pandemic stupid.

8:12

Huh. So what other periods

8:14

are there in history that are

8:16

kind of comparable to what we've experienced

8:19

over the past year or two where there

8:21

are all these recession warnings

8:23

and yet no recession.

8:26

Recessions aren't supposed

8:28

to be forecastable, So

8:31

for two years to have recession

8:33

calls so loud

8:35

has been a little mind blowing,

8:38

right, Like, we're not supposed to know when these are

8:40

coming, and we're

8:43

certainly not supposed to be so certain about

8:45

it. You'd have to go it's

8:48

like outside of living memory to find

8:51

episodes of inflation, like what we're seeing

8:54

after the two World

8:56

Wars, after the pandemic.

8:58

I mean, these are places we don't have very good

9:00

data in terms, and we obviously

9:02

don't have experience with them. So

9:05

to gravitate back to the

9:07

nineteen seventies, the vulgar fed, you

9:09

know, the early eighties, it makes sense

9:12

why that's where people go, because that's where we have data,

9:14

that's where we studied.

9:15

But like that's not what This.

9:17

Is very different world in the seventies

9:19

and today. So you mentioned we don't

9:21

have a giant data set. What

9:23

if we had seventeen recessions in the past

9:25

century and change. Given

9:28

that we can't be generally confident

9:31

about recession forecasts, how

9:34

confident should we be in the sam rule You

9:36

actually had discussed, Hey, maybe

9:38

it's not going to be right this time.

9:40

Absolutely, if the sawmo we're

9:42

going to break, it would be this time and

9:45

break in the sense that we could hit

9:47

that half a percentage point trigger, and

9:50

then the unemployment rate doesn't

9:52

really rise that much more. We don't go into recession.

9:55

Typically after the sawwar triggers,

9:57

you have almost a four percentage point

9:59

increase in unemployment relative to

10:01

the low two thousand and one that was the

10:03

smallest, and it was even still two percentage points,

10:06

so it would be very not

10:10

usual for you to get up to four percent,

10:12

which we kind of have to hang around four percent for a while

10:14

to have it trigger and then just kind

10:16

of hang there and maybe

10:18

come back down later. There's a very

10:20

good case for why this could happen. It goes

10:22

back to these disruptions of COVID. We

10:25

know it's taken the labor market time to heal

10:27

too. We had all these labor shortages. We need to

10:30

bring people back in. Millions

10:32

of people walked away from jobs because of caregiving

10:34

because they didn't want to die, and we stopped

10:36

processing immigrant work visas.

10:39

So these things are happening. There's this

10:41

kind of catch up now. Now

10:43

it's like there's more people and the jobs

10:46

have to catch up, versus in the labor shortage it

10:48

was the other way around. That just

10:50

can make things really messy, and

10:52

again if the summer we're ever going to break, it's this

10:55

time. And frankly, we have seen relationships

10:57

breaking left and right, so I would

11:00

in good company.

11:01

So let's talk about the

11:03

things that have broken in the post

11:05

pandemic era. We've seen shortages

11:08

of single family homes, we've seen shortages

11:11

of semiconductors. Is still a long way to

11:13

get a new automobile, and

11:16

it appears that we're still dealing

11:18

with a labor shortage. How

11:20

many more workers does

11:22

this country need to reduce

11:25

some of the tightness in the labor market.

11:28

We started to make a good bit of progress

11:31

in the second half of last year in

11:33

terms of getting workers back and

11:36

in some cases even better

11:38

than before. Women's prime age

11:41

employment is at record

11:43

highs, the percent

11:46

of workers with disabilities who have jobs

11:49

record high, and even some very

11:51

marginalized groups, like black men, their

11:54

labor force participation has looked great.

11:56

The black unemployment rate has been low.

11:59

We need these groups

12:01

to come in not just to make up

12:03

the whole that the pandemic created, but

12:06

to keep it going. In terms of

12:08

the labor market is really strong right now, and

12:11

that's a good thing, and it's one that we need to build

12:13

on. Because, as

12:15

you said, like, there's still a need

12:17

for talent and productivity, and that

12:20

was the big kind of under the

12:22

hood story of last year.

12:24

So I want to leave investors with

12:26

a little bit of advice from the creator

12:28

of the some rule. Tell

12:31

people what they should be looking for

12:33

if they really want to have the best

12:36

way of anticipating a

12:38

potential recession.

12:39

Keep your eyes on the labor market. The

12:41

labor market is so essential

12:44

to American consumers.

12:47

Like your paycheck, that's what you spend.

12:49

So if we lose the labor market, we lose consumers.

12:51

If we lose consumers, we're done.

12:53

And that's how we get a recession and typically

12:57

a week stock market. So

13:00

to wrap up, investors who are

13:03

concerned about all these recession

13:05

calls we've been hearing about for the past

13:07

two years should just ignore

13:10

them. And if you really want to know

13:12

when a recession is coming, keep

13:15

your eye on the unemployment rate. When

13:17

the three month moving average ticks

13:19

up zero point five to zero of a

13:22

percentage point relative

13:24

to its previous twelve

13:26

month low, that's a warning

13:28

sign. Get ready for a possible

13:30

recession. I'm Barry Ritolts

13:33

and this is Bloomberg's at the month.

13:35

Oh, you got your things

13:43

today.