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A recession indicator based off rising unemployment triggered in July. Claudia Sahm, a former Fed economist, takes credit for an indicator she did not invent. Let’s discuss.

What is the McKelvey Recession Indicator?

Take the current value of the 3-month unemployment rate average, subtract the 12-month low, and if the difference is 0.30 percentage point or more, then a recession has started.

Edward McKelvey, a senior economist at Goldman Sachs, created the indicator.

Claudia Sahm, a former Federal Reserve and White House Economist, modified the indicator from 0.3 to 0.5.

Please consider The Sahm Rule: Step by Step written December 7, 2023 by Claudia Sahm.

I created the Sahm rule, and it’s on me to communicate it well. I try. If you have any questions, please add them to the comments.

Sahm claims to have invented the rule. However, credit should go to Edward McKelvey, at Goldman Sachs.

False Positives

To eliminate false positives, Sahm modified the original McKelvey rule from 0.3 to 0.5 but the result is a much larger lag time negating her claim of “real time”.

Sahm’s 0.5 trigger eliminates all but one false positive (none if you discount the one and only time the indicator was early, and then by six months).

A trigger of 0.3 produces five false positives, albeit only one since 1964. If October of 2023 is false, that makes six false positives.

Using a trigger of 0.4 results in only two false positives with an average lag of ~1 month.

My Calculations vs Sahm

• Sahm takes the headline unemployment rate to one decimal place and then calculates a two-digit indicator. That’s mathematical silliness and I doubt it is what McKelvey did.
• I calculate the unemployment rate to three decimal places and round to two. For example, the reported unemployment rate for July is 4.3 percent but calculated to three decimal places is 4.253 percent.
• For July, Sahm calculates 0.53 and I calculate 0.49.

Discussion of Triggers

Based on a trigger of 0.3 percent, a recession triggered in October of 2023. I highly doubt that because the trigger inverted until April, a full 6 months later.

From October of 2023, McKelvey weakened to 0.21 percent in January 2024 and did not trigger again in April.

My preferred trigger is 0.4 percent, halfway between McKelvey and Sahm. That triggered in June.

A trigger of 0.4 percent rounded to a single decimal point does a better job of weeding out false positives without the lags of Sahm straight up.

Lead-Lag Times

Sahm labels “her” indicator as “real-time”. With lags as long as 7 month and never leading in the history of the data to 1948, there is nothing “real-time” about it.

A McKelvey indicator of 0.3 percent yields too many false positives.

A McKelvey indicator of 0.4 percent rounded to a single decimal point providers the best balance a well as a good average lead-lag time that averages to a 1-month lag.

On this basis, I estimate the recession started in May or June of 2024.

Recent Economic Data

July 8: Weak Data Says a Recession Has Already Started, Let’s Now Discuss When

I’ve seen enough. A recession has started. Let’s discuss starting with a very good indicator that has few false positives and no false negatives.

ADP Change in Employment

Data from ADP, chart by Mish

July 31: Small Business Employment Growth Is Now Negative (and What It Means)

ADP data shows year-over-year payroll growth is negative 88,000 for small corporations sized 20-49. Trends are negative in all but very large corporations.

Construction Spending

Data from Census Department, chart by Mish

August 1: Commercial Construction Spending Is Down 9 Consecutive Months

It’s not office related. And the Census Department has heavy negative revisions to spending. Let’s investigate.

Commercial construction is a tiny component of construction spending but a mighty contributor to future jobs once completed.

Click on above link for the importance of commercial construction.

Unemployment Rate

August 2: Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions

A rising unemployment rate, jumping by 0.2 percentage points in July, triggered a recession even by a much tighter calculation.

A recession has started.

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Unemployment Rate Jumps, Jobs Rise Only 114,000 With More Negative Revisions
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Commercial Construction Spending Is Down 9 Consecutive Months