What the Sahm Hill Is Happening? Near-Perfect Recession Siren Is About to Go Off

Another writer picks up on the Sahm Rule that I wrote about on June 18 (see: “Economic Collapse is Stalking us Like Death”), saying we are right on the cusp of when the near-perfect recession alert screams that we are flipping into recession:

The rule says when the 3-month average of the unemployment rate rises 0.50% off the bottom, the US is in a recession, even if no one has declared it yet.

The Sahm Indicator has now risen five months in a row. The BLS released its latest reading last Friday. The unemployment rate is now 0.43% off the bottom... very close to the 0.50% it needs to trigger the Sahm Rule. So the Sahm Rule hasn’t flashed yet… but it’s getting very close. 

The Economist puts it this way:

For financial markets the Holy Grail is a perfect leading indicator—a gauge that is both simple to monitor and consistently accurate in foretelling the future. In reality, such predictive perfection is unattainable. It is often hard enough to grasp what is happening in the present, let alone the future.

A perfect real-time indicator would thus be a potent goblet of knowledge, if not quite the Holy Grail, for investors and analysts to drink from. Recently they have turned their attention towards one impressive candidate: the Sahm rule.

Perhaps this is what had Powell worried as he readily slipped back to his dulcet notes about how a rate cut may be near because the Fed has other things it now needs to worry about that are as important as inflation. Powell, of course, knows about the Sahm rule because it was a Fed economist who discovered the nearly perfect relationship between that minimal rise in unemployment and the immediate start of a recession.

Developed by Claudia Sahm, a former economist at the Federal Reserve, in 2019, the rule would have been capable of identifying every recession since 1960 in its early stages, with no false positives. This is no mean feat given that the body which officially declares whether the American economy is in recession sometimes needs a full year of data. [The NBER] The Sahm rule, by contrast, typically needs just a few months.

Actually, the timing is typically even more immediate than a few months.

Of course, I have been warning that the Fed’s new job metrics are badly broken and giving plenty of evidence to support that from many angles. Unemployment has put in a number of head fakes, too, demonstrating its unreliability right now. So, the numbers the Sahm Rule is looking at may only be “garbage in/garbage out” if we have a distorted view of the labor market running throughout our metrics. In the very least, the head fakes may cause the alarm to flutter but not come on solid. Thus, I have been arguing we are already in a recession, but it is a stealth recession because new jobs data and unemployment data have been so damaged by the absurdity of the Covid lockdowns. So, the signal that turns on the Sahm Rule siren is a faulty wire right now.

That is why the Fed will keep tightening hard into recession … because we are already in a recession. We’d know it if the Bidenomics unemployment gauge wasn’t broken (intentionally in an election year?) and CPI was not constantly adjusted to show perfect election-year temperatures and is always underestimated by design anyway, which means real GDP, by which the National Bureau of Economic Research [NBER] largely declares recessions, would already be negative if we had true inflation data. With all of that broken, the Fed is already continuing to tighten while we’re in recession; so expect a deep recession by the time they figure out we’re going into one.

For the moment, the Sahm Rule is right at the cusp of sounding its alert, but still holding out just a little. Just enough to make the Fed reluctant to cut rates but afraid not to. Therefore … much will depend on the inflation reports the Fed gets between now and its September meeting.

In his testimony to Congress, Powell noted that the job market is cooling and that the Fed can’t let that go too far without causing other problems than inflation.

Powell doesn't howl, he sings sweet notes to markets

Fed’s Powell highlights slowing job market in signal that rate cuts may be nearing

Powell pointedly noted that “elevated inflation is not the only risk we face.” Cutting interest rates “too late or too little could unduly weaken economic activity and employment,” he said….

On Tuesday, Powell noted that inflation reports covering the first three months of this year did not boost Fed officials’ confidence that inflation was coming under control.

“The most recent inflation readings, though, have shown some modest further progress,” Powell told the Senate committee, “and more good data would strengthen our confidence that inflation is moving sustainably toward 2%.”

So, the Fed still needs that extra data, and the question is can the Biden administration concoct the numbers enough to give that to them? They can keep ol’ Ned Divine propped up enough to cash in his lottery ticket … well until the recent presidential debate when the puppet controls that operate the Biden corpse seemed not to be working right. (If you haven’t seen Waking Ned Devine, I highly recommend it as the Irish counterpart to Weekend at Bernie's, another movie about keeping Joe Biden looking alive.) So, they are usually masters at fake information and fake animation, but they seem to have gone as far as they can with some of it … maybe all of it.

Gregory Daco, chief economist at the consulting firm EY, said he thought Powell’s “greater focus on the two-sided risks to the outlook is welcome, albeit a little late.” Daco added that he thinks the Fed ought to cut its benchmark rate at its July meeting. Otherwise, he suggested, businesses might soon step up layoffs as the economy slows.

You can be sure the Fed is not going to get this right. The question is will inflation cut it a break by delivering the “good data” the Fedheads are hoping for? As I wrote recently, I don’t think so because 1) “Almost Nothing Is as Reported,” and 2) “The Fed's Inflation Fight is Far from Over” because, as I laid out for paying subscribers, housing has some major moves already in play for CPI in the months ahead, and oil, I said was almost certain to rise this summer, which it did and which it looks set to continue to do, and oil drives the prices of other things, and it was the primary reason inflation edged down in the last few months (by some measures that include oil, which the Fed usually excludes).

By the time the Fed’s September meeting arrives, inflation may be back to nudging upward, though Citi doesn’t think so as it drops a “rate cut bomb” on the Fed’s September meeting, believing inflation will be well under control by the point unemployment is screaming “start cutting now!”

The Return of Inflation may even go beyond nudging.