The R-word

11:30 a.m. New York time

OK. We can say the word now. No one likes to say it. No one wants to jinx the economy. Yet, we must face facts. We are, really and truly, in a recession.

No word on it yet from the National Bureau of Economic Research (NBER), the private organization that “officially” declares recessions, generally quite some time after they begin, but instead by something new, the Sahm Rule, created in 2019 by a Federal Reserve economist Claudia Sahm with the goal of providing an early signal for the Fed governors and bank presidents to identify the start of recessions.

Her system is based a moving average of the unemployment rate and backtested for decades has proven to be quite accurate in its calls. A Reuters article last year described her system.

Today, based on a 14.7% unemployment, is the first real-time signal since the Fed added the Rule to its data toolkit, Fred.

Screen Shot 2020-05-08 at 8.26.37 AM

Recessions are shaded grey in the Fred chart. The trigger point for calling a recession with the Sahm Rule is 0.5 or above. Before the pandemic, in February, it stood at 0.00. In March, when job losses from the pandemic was just beginning, it reached 0.30. And a monthly later, in figures released today, it shot up to 4.00, an all time high since December 1959, when source data first became available.

The prior high came during the Great Recession of 2007-2009. The Sahm Rule, had it existed back then, reached the 0.50 trigger in April 2008, four months after the recession began, and peaked at 3.90 in June 2009, a year and a half into the recession.

The velocity this time around is, to say the least, somewhat higher. Astoundingly so, actually. The Coronavirus Recession has triggered the Sahm Rule and reached an all-time high all in a single month. The NBER committee will declare the recession when it has sufficient data — there’s a far more complex analysis than the Sahm Rule provides — but until then we have a basis now for adding the R-word to our lexicon.

By Tim Bovee, Portland, Oregon, May 8, 2020


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

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