How to spot a recession

BY ALMOST any measure, America’s economy is in fine fettle. GDP growth is robust. Unemployment is nearing a 50-year low. And the stockmarket is up by a whopping 50% since 2016. Yet, for all the positive economic news, there is no shortage of hand-wringing on Wall Street about a looming recession. But precisely when will it strike? Economic statistics are often published months after the fact; by the time a recession is officially underway, there is often little investors and policymakers can do about it.

One new clue comes from a new report by Claudia Sahm, an economist at the Federal Reserve, who has developed a new method for predicting economic downturns. In the report, Ms Sahm argues that when the three-month average unemployment rate is at least 0.5 percentage points above its minimum from the previous 12 months, the economy is in a recession. This simple measure, it turns out, has correctly called every recession in America since 1970. In January 2008, for example, Ms Sahm’s index warned of the coming Great Recession. The index had also flashed red in early 2001, amid the bursting of the dotcom bubble. Today, conditions are considerably less dire. With unemployment 0.07 percentage points below its minimum of the past year, the “Sahm recession indicator” suggests that the chance of a downturn occurring in the next year is just 10%.