Lots More With Claudia Sahm on What the Sahm Rule Is Saying Now

SPEAKER_1 (0:03)

Bloomberg Audio Studios, podcasts, radio, news.

Joe Weisenthal (0:10)

Hi, Claudia.

Claudia Sahm (0:11)

Hello, how are you doing?

Joe Weisenthal (0:12)

Good, how are you doing?

Claudia Sahm (0:14)

Pretty good, it's a little calmer this week, so no.

Joe Weisenthal (0:17)

Oh yeah, last week was a little nuts.

Tracy Alloway (0:19)

Last week was nuts, oh my gosh.

Claudia Sahm (0:21)

Yeah, so good to catch breath.

Tracy Alloway (0:25)

Sometimes I wonder if you have a Google Alert set up for Sahm, and if it's just like going off constantly in the past 10 days.

Claudia Sahm (0:33)

There were several hits in my Google Alerts the last couple, yeah. I don't have one on the Sahm rule, I think that probably would have been even more out of control.

Joe Weisenthal (0:45)

I did a deadlift. One, two, three.

Tracy Alloway (0:47)

Hegemony.

Joe Weisenthal (0:48)

Okay, good.

Tracy Alloway (0:51)

Hegemony, barges.

Joe Weisenthal (0:52)

This is an after school special, except.

Tracy Alloway (0:54)

I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the US.

Joe Weisenthal (1:00)

Where's the best squid in pasta?

Tracy Alloway (1:02)

These are the important questions. Is it robots taking over the world?

Joe Weisenthal (1:05)

No, I think that in a couple of years, the AI will do a really good job of making the Odd Lots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore. We do have.

Tracy Alloway (1:17)

Cha-ching. The perfect guest. You're listening to Lots More, where we catch up with friends about what's going on right now.

Joe Weisenthal (1:25)

Because even when the odd lots is over, there's always lots more.

Tracy Alloway (1:28)

And we really do have the perfect guest. We are speaking with Clauda Sahm, of course, the creator of the Sahm rules. She is chief economist and New Century Advisors, and also a columnist at Bloomberg. And you've been in the news a lot recently, Claudia, because actually I can't figure this out. Has your rule actually triggered or not?

Claudia Sahm (1:54)

It has, the way that I calculated the Sahm rule. And it was very close to the trigger. So the value in July is 0.53, and the threshold is 0.5 or above. And there have been people doing various calculations of the same principle of change in the unemployment rate relative to the past 12 months. And you can get very small differences depending on how you do it. I think that just says, I mean, it's right at the edge, but the official Sahm rule is triggered.

Joe Weisenthal (2:25)

And every time I write about the Sahm rule, I'm always like only 99% sure, or 90% sure I remember what it is, and I always go look it up. But what it basically states is that when the three-month moving average of the unemployment rate is 0.5% above the 12-month low, then historically in post-World War II recessions, every single time that has happened, every time it's gotten above half a percent, a recession came soon thereafter. Is that correct?

Claudia Sahm (2:57)

Yeah, half a percent or more. Half a percent or more, sure. Yeah. Historically and in particular, that very precise record is in the data as it was published at the time.

Joe Weisenthal (3:14)

Oh, right.

Claudia Sahm (3:16)

Right around. But in principle, yes. The important things, you take the three-month moving average, you smooth out over time, you take that current value three-month average, look at the low of the three-month averages over the prior 12 months, not including the current, the prior. Those are the changes. But I think the formula, the thresholds very much go back to the purpose of it, which was to create an indicator, a simple one, to initiate fiscal relief. Right. So like stimulus checks, extra jobless payments. So it need to be something simple, and it needed to happen in the recession. So like the recession is already here, the SOM rule is not a forecast. It typically has triggered about three months in to recessions historically, and it's not meant to get ahead of it. It was meant to. Like it's here, the unemployment rate has started to rise. We know in recessions, it continues to rise. A half a percentage point increase in the unemployment rate is not a big deal. This is not a worrisome feature in and of itself. It's where it tends to go from there that makes the recessions damaging.

Tracy Alloway (4:26)

Wait. So this is important. So the origin of the rule is that you wanted something that was dependable, that you could use as more or less immediate guidance for the government to actually come in and do something about recession. But because the rule is also encoded and calculated in a very specific way, so the US is entering recession whenever unemployment is running 0.5 percentage points higher than the prior 12 months flows. Because it's set in stone, it also cannot take into account, I guess, differences in the current economic environment or maybe nuances that are not necessarily captured by those hard numbers.