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Unemployment Data from the BLS, Calculation, and Chart by Mish

Dudley Says “I Changed My Mind”

Bloomberg columnist Bill Dudley says I Changed My Mind. The Fed Needs to Cut Rates Now.

I’ve long been in the “higher for longer” camp, insisting that the US Federal Reserve must hold short-term interest rates at the current level or higher to get inflation under control.

The facts have changed, so I’ve changed my mind. The Fed should cut, preferably at next week’s policy-making meeting.

The Fed’s efforts to cool the economy are having a visible effect. Granted, wealthy households are still consuming, thanks to buoyant asset prices and mortgages refinanced at historically low long-term rates. But the rest have generally depleted what they managed to save from the government’s huge fiscal transfers, and they’re feeling the impact of higher rates on their credit cards and auto loans. Housing construction has faltered, as elevated borrowing costs undermine the economics of building new apartment complexes. The momentum generated by Biden’s investment initiatives appears to be fading.

Most troubling, the three-month average unemployment rate is up 0.43 percentage point from its low point in the prior 12 months — very close to the 0.5 threshold that, as identified by the Sahm Rule, has invariably signaled a US recession.

Historically, deteriorating labor markets generate a self-reinforcing feedback loop. When jobs are harder to find, households trim spending, the economy weakens and businesses reduce investment, which leads to layoffs and further spending cuts. This is why unemployment, having breached the 0.5-percentage-point threshold, has always increased a lot more — the smallest rise was nearly 2 percentage points, trough to peak.

Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk.

It’s Too Late

The above column by Dudley is the first thing I recall ever largely agreeing with him about.

Yet, I want to point out a few things. First, the Fed is the cause of these boom-bust cycles, never the savior in preventing them.

Second, Claudia Sahm lifted, without credit, her recession rule from Edward McKelvey, a senior economist at Goldman Sachs.

And third, it’s too late because a recession has already started.

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.

Claudia Sahm, a former Federal Reserve and White House Economist, changed 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.

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

I discussed McKelvey on July 8, 2024 in my post 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.

When Did Recession Start?

I suggest May based on a McKelvey 0.4 trigger and an average lag of about a month.

This also corresponds to more pronounced weakness in many major economic reports.

My lead chart now is the same as my lead chart on July 8.

McKelvey June 2023-Present

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At 0.3 we had a weak McKelvey trigger in October but the signal quickly faded below 0.3 for the next five months not resurfacing until April.

Using a compromise 0.4 trigger we have as signal for June, although barely. It’s 0.399 to three decimal places.

Using a fatter crayon of 0.35 we had a weak signal in May, and a stronger one in June.

Recession Lead Times in Months, McKelvey vs Sahm

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Using a trigger of 0.4 instead of 0.3 produces similar results to 0.3 but with only two false positives instead of five or six (depending on how October is treated and also assuming a recession is underway or soon at hand).

Also using 0.4 as the trigger, the sum of the lags is 12 months in 11 recessions, with two leads of one month and two right on time. That makes the average lag ~1 month.

At 0.40 a recession just triggered for June. At 0.35 a recession triggered in May. Importantly, for five straight months the signal has strengthened. This is unlike October of 2023.

What’s Happened Since July 8?

Data has weakened further, much further in many instances.

July 17: 5 out of 12 Fed Districts Show Flat or Declining Economic Growth

July 18: Continued Unemployment Claims Jump to the Highest Level Since Nov 2021

After stabilizing for about a year, continued unemployment claims have surged in the last two months.

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July 19: Three Top Reasons Mortgage Delinquencies Are Rising

Mortgage delinquencies are not at a seriously problematic level, but they are rising for ominous reasons.

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Mortgage Delinquency Data from Hud, chart by Mish

July 23: Existing Home Sales Drop 5.4 Percent

Signs of Severe Credit Card and Auto Loan Stress in Generation Z

The economy is slowing and that will hit the zoomers first and the hardest, especially renters.

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Tying the economic reports and political polls together please consider Signs of Severe Credit Card and Auto Loan Stress in Generation Z

There are 10 charts in the above link. Please check it out.

Nearly everything fits the recession picture. Negative revisions will take care of the rest.

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