The frustration of Claudia Sahm as her perfect recession indicator turns all eyes on her

The last week 'has not been pleasant' since her recession indicator signaled a downturn, the famous economist says.

• Claudia Sahm's recession indicator, the Sahm Rule, has been triggered for the first time since 2020.
• But Sahm believes the current signal is a false positive due to rising labor force participation.
• "Maybe you can't do early-stage recessions in a reliable way," Sahm told Business Insider.

From the outside looking in, one might think it's a good time to be Claudia Sahm.

All eyes are on the famous economist and her recession indicator. Her model, known as the Sahm Rule, says that the US economy is already in a downturn when the three-month moving average of the unemployment rate rises by at least 0.5% from its trough over the previous 12 months.

Last week, after July's employment report was released, the measure rose to 0.53%, officially triggering the rule for the second time since its creation in 2019; it also triggered at the pandemic's onset in March 2020. When backdated, the model has a perfect track record of identifying recessions in real time going back to at least 1960.

The indicator's accuracy has lifted Sahm to extraordinary heights in the world of economics in just five short years. Strategists and economists across Wall Street cite her rule, which has been featured in just about every major publication in recent days. After her rule was activated on the morning of August 2, she talked about it on the "Bloomberg Surveillance" radio show with longtime broadcast journalist Tom Keene, who called her "without question, the most influential economist in America right now."

Yet, in spite of all the notoriety it's generated for her, Sahm is less than thrilled with her creation right now and has been for the last few years.

She's less than thrilled that it's flashed a positive sign when she, in fact, does not believe the US economy is in a recession right here and now. She's less than thrilled that people weaponize the rule for their gain on both sides of the recession argument. And she's less than thrilled that she's made something that attaches her name to disastrous economic events that take such high emotional tolls on people — including herself.

"Reality is this has not been pleasant," Sahm said. "With the wiring I have, being an expert on recessions was probably not the smartest choice. If the Sahm Rule were like something amazing happens in the world and the Sahm Rule triggers, that'd be so cool. But it's not."

A false positive?

Sahm says that the supply side of the unemployment equation is the "Achilles' heel" of her indicator, and rising labor-force participation is the reason it is producing a recession signal despite her belief that the economy is not in a downturn. The pandemic has upended labor market dynamics, and current job growth and consumer spending have not yet deteriorated enough to show signs of a recession, she told Business Insider earlier this week.

"This pandemic cycle has been different on so many dimensions and has laid waste to so many economic models and rules of them," Sahm said in another interview on Wednesday. "If the Sahm Rule was going to fail, it's going to be this time."

The daylight between Sahm's personal views and her model's positive recession signal has been tough on the former Fed economist. Not because the indicator might be wrong, but because she's concerned it's creating uncertainty around the health of the economy and striking more fear into people than is necessary if it turns out we aren't actually in an economic contraction.

It's made her question whether it's even possible to consistently identify the start of recessions in real time.

"Maybe you can't do early-stage recessions in a reliable way, and maybe the cost of getting people very concerned" outweighs the benefit, she said.

Again, potential costs are high because while Sahm acknowledges the labor market is trending in the wrong direction, there's still time for the Fed to correct course and avoid plunging the US economy into recession altogether, she said.

To do so, Sahm advised its Federal Open Market Committee to slash rates by 50 basis points at its September meeting and then continue on a cutting cycle. She thinks the central bank should have cut rates at its July meeting and is losing the luxury of adjusting policy gradually going forward. Inflation is contained enough, she said, to where the Fed now ought to be more concerned about a souring job market, especially considering lags in monetary policy.

The original intent behind the Sahm Rule

The Fed's success in guiding the economy to a soft landing is almost personal for Sahm, who finds it difficult to separate downbeat labor market data from their real-world implications for unemployed people. It's another reason the last week or so hasn't been as glamorous for her as someone like an aspiring economist might have imagined.

That predisposition to empathy is clear in Sahm's original intention for her model. In creating it, Sahm was attempting to form a framework for legislation that would have stimulus payments automatically go out in times of economic trouble instead of waiting for Congress, which so often cannot find consensus, to take action. Accomplishing that goal was why she left the Fed in 2019 after she created the rule.

Despite what she sees as a false positive this time around, Sahm doesn't plan on adjusting the model's parameters. Instead, she's busy looking at the underlying data to identify where the US economy is in the business cycle right now.

Tweaking her model or developing a new one is something she's leaving to someone else.

"What I am so looking forward to is someone deciding it's great to have something like this and is motivated and goes off and does it better," Sahm said.