Some commonly used indicators seem to have become obsolete in the post-epidemic era, and it is said that this new indicator can detect economic recession faster and more reliably.
California economists have proposed a new set of indicators that they claim can detect recessions faster and more reliably. According to the latest data from the US Department of Labor in July, this new indicator shows that the US economy is about 40% likely to be in a recession, possibly starting as early as March this year.
Pascal Michaillat, an associate professor of economics at the University of California, Santa Cruz, and Emmanuel Saez, a professor at the University of California, Berkeley, introduced this new rule in a paper published earlier this month.
This new rule uses a methodology similar to the 'Sam rule', an indicator developed by former Fed economist Sam, which relies on changes in the unemployment rate to predict economic recessions several months in advance. However, the new rule has several important differences.
After several months, the Sam rule was finally triggered in July when the three-month average unemployment rate rose 50 basis points above the lowest level in the past 12 months.
Like the Sam rule, the new rule also relies on changes in the three-month moving average unemployment rate, but it also incorporates changes in vacancy rates. The authors believe that this allows the new rule to filter out false positives while reducing the detection threshold.
Another important difference is that unlike the Sam rule, the new rule sets a minimum threshold, above which the possibility of recession increases, and a maximum threshold, above which the onset of recession can be almost certain.
This new rule was proposed when investors questioned the reliability of certain long-term indicators, which seemed to have failed in the post-pandemic era.
The inverted yield curve has been in place for more than two years (short-term Treasury yields have been higher than long-term Treasury yields), but the US economy has not entered a recession. The inverted yield curve was once seen as a clear indicator of an impending recession.
Although the yield curve recently briefly returned to normal, it inverted again on Monday, with the two-year Treasury yield higher than the 10-year Treasury yield.
Even Sam herself questioned the accuracy of the rule named after her, saying she does not believe the economy is in a recession. Instead, she pointed out that distortions in labor supply in the post-pandemic era and the recent surge in immigration numbers may have weakened the effectiveness of her rule.
Editor/Lambor