American financial analyst and financial website MarketWatch columnist Mark Hulbert's latest article pointed out that "the recession is underway", waiting for confirmation from the National Bureau of Economic Research (NBER), which is considered the arbiter of the US economic recession.

This is the confident prediction that Hulbert received from Jack Schannep, former editor-in-chief of TheDowTheory.com investment newsletter, a few days ago. Schannep's view is based on an indicator he created in 2000 called the "Schannep Recession Indicator" (SRI), which corresponds to the trend of the US unemployment rate.

According to Schannep's successor Manuel Blay, the United States has experienced 12 economic recessions since 1946, and "all of these recessions were discovered by the SRI." Blay added that SRI only issued one incorrect signal in October 1959, six months before the economic recession that began in April 1960.

SRI is calculated based on the three-month moving average of the unemployment rate. When the unemployment rate rises at least 0.4 percentage points above the cyclical low point before the moving average, it triggers a recession signal. The latest signal from SRI was triggered on June 7th when the non-farm employment report showed the unemployment rate for May was 4%, which raised the three-month moving average to 3.9%, 0.4 percentage points higher than in April of last year.

SRI has similarities with the so-called "Sahm Rule," which was proposed by former Federal Reserve economist Claudia Sahm in 2019. However, there are two main differences between the two: firstly, the "Sahm Rule" does not trigger until the three-month moving average of the unemployment rate has risen at least 0.5 percentage points, while SRI sets the threshold at 0.4 percentage points. Secondly, the "Sahm Rule" compares the three-month moving average with the low point of the previous 12 months, while SRI compares it with the recent cyclical low point - which may be a low point more than 12 months ago. Currently, the "Sahm Rule" does not indicate that an economic recession is imminent or underway. However, if the US economic recession is not yet in sight, it is getting closer.

An indicator that can accurately predict economic recessions is clearly valuable. Blay reports that the average lag time between the start of an economic recession and when SRI is triggered is 1.58 months.

However, since the NBER will be responsible for announcing US economic recessions, why does the market need other economic recession forecasting indicators? The answer is that NBER usually takes several months or even more than a year to determine when an economic recession began. Sometimes, when NBER confirms that an economic recession has already started, the economic recession has already ended, such as the economic recessions of 1990-1991 and 2001.

Clearly, humility is still a virtue, given the many confident predictions of impending economic recessions on Wall Street that have ultimately failed. As an example, consider the inverted US bond yield curve, which was considered an almost foolproof economic recession forecasting indicator. But this time it failed: the yield curve has been inverted since July 2022. There is also the Bloomberg recession model, which in October 2022 announced that there was a 100% chance of a US economic recession within a year.

A good example of SRI's advantage over NBER is the economic recession that accompanied the global financial crisis. In early February 2008, after the unemployment rate for January 2008 was announced, SRI was triggered, which had been ongoing for two months, almost a year earlier than NBER's announcement in December 2008 that the crisis began in December 2007.

However, since Wall Street is full of those who confidently predict the onset of economic recessions but ultimately fail, humility is still a virtue. Take the example of the inverted US bond yield curve, which was considered an almost surefire economic recession forecasting indicator. But this time it failed: the yield curve has been inverted since July 2022. There is also the Bloomberg recession model, which predicted in October 2022 that the US economy would enter a recession within a year.

As Sahm acknowledged in a blog post last December, even if her model indicates that an economic recession has begun or is imminent, "a recession is not a foregone conclusion…this time might be different."

Edited by Jeffrey