Claudia Sahm, a former member of the Federal Reserve and the Council of Economic Advisors, devised a method of predicting the early stages of a recession.  This rule has been published throughout media outlets.  Its authenticity was cited by the famed economist, Larry Summers.  I wanted to respond as to my thoughts on her observations and why it is critical to examine economic information as published.  While unemployment is a factor in recessions, it can be a lagging or co-incidental indicator.

According to the Bureau of Labor statistics, there have been eight recessions since 1970.  These are the results of each of Sahm’s indicators.

1970 – Lagged the beginning of the recession by almost a year, continuing to indicate a recession almost a year after the recession was over.

1973 – Lagged the beginning of the recession by 6 months, continuing to indicate a recession 11 months after the recession was over.

1979 – Lagged the beginning of the recession by one year, continuing to indicate a recession one year after the recession was over.

1981 – Lagged the beginning of the recession by 11 months, continuing to indicate a recession 14 months after the recession was over.

1990 – Lagged the beginning of the recession by one year, continuing to indicate a recession one year and 9 months after the recession was over.

2001 – Lagged the beginning of the recession by one year and 6 months, continuing to indicate a recession 13 months after the recession was over.

2008 – Lagged the beginning of the recession by 6 months, continuing to indicate a recession one year after the recession was over.

2020 – Lagged the beginning of the recession by 3 months, continuing to indicate a recession 10 months after the recession was over.

False positives occurred in 1983, 1986, and 2003.  These are the times when the indicator predicted a recession and was wrong.

Of the eight recessions since 1970, Sahm’s indicator has falsely predicted three.  Each of her predictions have materially lagged the outcomes and have continued to signal a recession long after the recession was over.

In other words, her predictor is deceptive.  It leaves me questioning why she would put out such nonsense.  Are there other motives?  What I found was a quote by Claudia Sahm which stated, “I created the Sahm rule to send out stimulus checks automatically.  The idea was to act fast to make the recession less severe and help families.  The star was always the stimulus check, not the indicator that other people named after me.”*  As you can interpret from her quote, the motive was to create more government spending by finding a way to justify the spending.  As is with most forecasts, the motive and bias of the forecaster should be examined along with the actual accuracy of the forecast.  What should be important to the investor is how the investment manager’s style performed during the recessions and not the credentials of the person making the forecast.  As John Kenneth Galbraith once quoted, “There are two types of forecasters: those who don’t know, and those who don’t know they don’t know.”

*Dr. Sahm, Claudia (2022-12-30). “The Sahm rule: I created a monster”. Substack. Retrieved 2024-07-31.

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