Sahm Rule Recession Indicator

Hey everyone and thanks for jumping back Into the macroverse today we're going to Talk about the psalm rule recession Indicator and how it can be used to Better pinpoint the onset of a recession If you guys like the content make sure You subscribe to the channel give the Video a thumbs up and check out into the Cryptographers premium at into the we do have several Different tiers available including of Course a free one so make sure you check It out links in the description below Let's go ahead and jump in so there's Often been a discussion Um you know throughout various Outlets Over the last year as to whether we're In a recession or not and we've covered Several different indicators on this Channel and while there are a few Indicators like two consecutive quarters Of negative GDP that might have Suggested we were in a recession in the Earliest ages of 2022 there still are Several indicators that do not yet Suggest that the US economy is in a Recession okay now it might feel like a Recession to a lot of people uh if you Know if you're if you're looking at at The stock market going down but again The stock market is not the same thing As the economy and the stock market can Often lead before the economy goes in The direction that it's going to go so

What's useful is exploring of course as We do on the channel various indicators That can give us insight into when the Onset of a recession occurs now you Might wonder won't they tell us when the Recession occurs well well they might Say that a recession occurs but they Might wait a year to back and then Backdate it to when it actually occurred So suppose you're of the opinion Um like I generally am that risk assets Like equities bottom during a recession If you get one then the problem is if You're waiting for a recession to be Declared by the time it's declared the Bottom could already be in so imagine we Go into a recession say in September Okay so let's say the US economy enters Into a recession in September and let's Suppose the market Bottoms in November But you're over here waiting for a Recession to be declared and they might Declare it sometime later let's say they Declared in in February and then they Back date it towards September So you're probably sitting there Thinking oh well I'll just wait for it To be declared and then when they Declare it they backdate it so then Whatever the new local low was you Probably you might not have thought that That was actually the bottom when in Fact it could have been and so we need To constantly look for indicators that

Give us better insight into when the Onset of the recession actually occurs Not just when it's declared months or a Year later okay this is an important Point The reason why in just a segue for a Little bit when you look at say treasure Yield spreads and the inversion of them This is the two year and the ten year it Typically means a recession is coming Right at some point now there's a lot of People that might say things like well You know everyone's been predicting a Recession forever and you know Eventually they'll be right but the Thing is is when when the yield curve is Inverted like this when it inverts for The first time it's usually not an Indicator that we're in a recession Right if you look every time it inverts We've not really been in a recession When it inverts it's when we come out of It so it doesn't predict that a Recession is happening now when it Inverts it's predicting a recession will Likely occur When it uninverts right at some point The economy is going to have you know It's basically saying the economy is Sick and at some point we're going to Feel the effects of it could be six Months could be 12 months could be 18 Months the average time I believe For the yes Earth for the uh for the

Uninversion of the of the yield curve or Say maybe the um the onset of a Recession from a sustained inversion of The yield curve maybe three months or so Is like 17 months okay and we've looked At plenty examples where it takes like 12 or 18 months from the from that first Sustained inversion until the actual Onset of a recession so is that useful It not really right it's not really that Useful in trying to figure out when the Recession starts because you don't know How long we're going to spend down here Before it uninverts so there's this Other indicator that I want to talk About in this video so it's called the Som rule recession indicator and just Provide a brief description maybe pause The video here if you want to read the Entire description but I'll cover a Little bit of it it's an indicator it Was developed by an economist named Claudia Sam and it's based on the idea That changes in the unemployment rate Can be used to identify the onset of Recession now we've talked about this Before right we've talked about how the Unemployment rate so if we go take a Look at the unemployment rate the They're probably not going to declare a Recession until the unemployment rate Starts to go up in a material way right Like two consecutive quarters of Negative GDP is not enough I'm going to

Call a recession if the unemployment Rate is still at a secular low and it is Right it's still at three and a half Percent but look at where the prior Recessions occurred right these gray Shaded regions is when the unemployment Rate starts to go up in a material Fashion now What what this economist did Claudia Psalm is she said okay well the rule States that if the three-month moving Average Um if the three-month moving average of The unemployment rate increases by half A percentage point Or more Above its low from the previous year so Looking at the last 12 months Then it's considered a recession right So if the three-month SMA this the the Simple moving average of the Unemployment rate increases by half a Percent all right Now let's take a look at what that has Historically meant before diving in to Where we are today all right so I Suppose we'll start with a financial Crisis now let me let me first say the The primary y-axis over here is the S P 500 price this is the Blue Line This is The sumrable points the secondary Y axis Which corresponds to the Orange Line This horizontal line going across the Page is that half percent is the half

Percentage point or more so the when the Unemployment rate increases by that so We wanted to know when does the Orange Line Cross the horizontal line okay Let's see what happened in the financial Crisis all right when did it cross It was just below it in January 2008 and It crossed in February so it would have Said by February of 2008 that were in a Recession by February After only The recession being backdated to December so again they don't declare a Recession the minute it starts they Backdate it so it would have been Accurate within a couple of months right The bottom still came later right the Bottom still came later Look at crash when did it cross It hit the number in June The recession Started in March about three months or So right about three months the bottom Came later Looked at the 1990s it crossed the line In October the bottom also occurred in October So it basically would have given you Within one month or so you might say Well wasn't that the exact month there Is a one month lag okay so it actually Has a one month lag on on actually Getting the data but you can go through

And look at a lot of these cases the Cross here occurred in October of 81 The recession actually started in July So again just a few months lagged a few Months lag the bottom occurred in August Of 82. right I mean a good bit later but It does it did tell you when the Recession actually started within a Couple of months and and again there's Been times where it took a year for the Recession actually to be declared and Then back data to that point now what Might be more interesting Is to Zone in here on the on the period Of high inflation that we had in the 1970s okay so what I want to do is look At these two periods here we know we had High inflation back then we're also in a Period of high inflation today when did It cross the the the the Benchmark right March of 1970 we would have got we would Have received that data in April because There's a lag on the data get actually Getting it we would receive that data in April the bottom would have occurred in May huh so you had a month right it was Like Hey signal flashed The next month the market bottomed Let's go take a look over here In June of 1974 we were just below it it Crossed the mark in July You would have received that data a Month later because there's a month lag So you would have received it in August

The bottom of the market occurred in October So One of the reasons I like this indicator Is because when it crosses That that threshold that half percent Threshold what it shows you is that the Market is likely first of all the Market's Pro or the the economy the US Economy is likely in a recession okay so That means that there's really no point In Waiting six or 12 months to start Thinking about the market bottoming Because you you know you wait until the Official recession is declared if you do That you might miss the mark by six 12 Months because they're likely just going To backdate it right they're likely just Going to back date their recession until You know to some nebulous time in the Past right so like imagine imagine if They were to back date the recession Let's say they declare a recession and And say like I don't know 10 months and They back date at eight months then what Good does that do you if the bottom Occurred five months before they Declared it right so you always want to Look at at some like more leading Indicators indicators that are a bit More insightful in the short term so That you can actually understand are we In a recession or not because if you Think we're in a recession at any given

Point then you you want to really start Looking for the econ for the for the s p To actually Bottom now listen there's no Guarantee we go into a recession right There is no guarantee and if you think There is then that might not be the best Thing as an investor because if there's No such thing as a sure thing right and With investing there's no such thing as Thing there's no guarantee we go into a Recession I would say that it's more Likely than not okay it's more likely Going to happen than not and one of the Reasons is because I would say the single most important Factor into whether we go into a Recession or not is the Federal Reserve And the Federal Reserve is is I think Usually responsible for pushing us into A recession because of their overly Hawkish stance and you might say well Why are they so hawkish if if it seems Like indicators are not going in the Right direction well first of all There's actually plenty of indicators Like the unemployment rate that are Still relatively low and it's secular Lows at three and a half percent Furthermore They have high inflation it's part of Their mandate right it's their mandate They need to get inflation back down so While they normally would have stopped Raising interest rates and maybe they

Would have normally stopped quantitative Tightening right rolling off assets from The balance sheet while in normal times They made a stop that long ago and is Why a lot of people would have assumed That that the rate hiking cycle and the You know the the QT with stock last year The reason it hasn't is because Inflation remains sticky and it still Remains high and so they're being forced Again to do things that they normally Wouldn't do when this happens it's more Likely to send us you know it it puts us Into a conditional you know an area with Conditions that are more likely to send Us into a recession okay So then where are we today right you Know all this stuff is good where are we Today and and what does it suggest about About today's economy and is it giving The signal well right now it's not Giving a signal okay you can see we have To we have data through December but we Already know the unemployment rate I Mean it you know it's actually been Going it went back down last month so it Went back down to to three and a half Percent so you know this here while it It's still relatively low you know we're Nowhere near that half percentage Point Nowhere near it Does that mean Does that mean you should be lulled into A false sense of security absolutely not

Absolutely not go look at what happened In the 90s you know it came up to 0.27 It came back down to close to zero and Then within a few months it just shot up And during that period once it shot up Quickly that's when the s p bottomed Right when the unemployment rate finally Got shot up and remember the Federal Reserve they want To soften labor marketing conditions They don't like the fact that the labor Market is tight because of wage Inflation right if if the if the labor Market is tight it's not going to help CPI come down it's not going to help Inflation come down and and so they Arguably are trying to trying to make The unemployment rate go up to loosen up The labor market to help curb some of The effects of wage inflation in the in The effects I would have on the on the Overall CPI So with all this in mind If you look at where we are today it's Been slowly going up right slowly going Up from the negative area right to Positive but it's sort of right around That zero Mark we'll have to keep an eye On this you know does it see a material Move to the does it go up materially at Some point this year at what point does This occur and if and when it crosses The zero line What does that mean

That means we're likely in a recession Okay now the last thing I want to look At is the monthly change so you take the Derivative I think taking looking at the Change in the indicator can actually be More insightful sometimes not all Indicators maybe this is one that's not As insightful as others but just to look At the monthly change if you look if you Just go observe what happened when this Goes from say Um positive to negative the bottom is Usually on here when it made that change You can see that actually basically Called the bottom but that's not going To you know it's not going to be the Case for every single time and the Problem with this is is that you know This this indicator is is is very Stochastic right it doesn't really move In a clear Direction all the time and it Can it can more or less oscillate around That zero Mark like look at what Happened during this decade of economic Expansion it was just all over the place But it was still within a pretty tight Range between like negative 0.1 and 0.2 Okay so it wasn't really Giving any clear signal when you see it Go up quickly and then go down quickly That's typically you know more or less Say a sign of a recession right when It's moving up quite quickly and once it Crosses the zero line after a major move

To the upside that's usually indicator The Bottom's already n right so like if You go back and look at history you know Once it crosses back down the bottom is Usually already in okay now where is it Today Again it's not making any any Significant moves it's still at this Point looks like it did over here where It's just oscillating between a pretty Tight range right so you're not you're Not actually seeing any clear signs of Of this going up quickly or going down Quickly and so I think that's the reason Again that a lot of economists are Hesitant to call a recession when the Unemployment rate Still Remains at a Secular low and and you're not really Seeing Mass layoffs now I know there's Some headlines from some major tech Companies where you're seeing like 6 000 Employees laid off or ten thousand Employees laid off a lot of these Companies hire 20 or 30 000 people last Year okay and additionally tech jobs I Think only make up like a very small Percentage like you know a couple Percent or something of the overall Market and so while tech jobs might be An a an omen as to what could be coming For the service sector it has not come For the service sector yet and until you See that actually occur I don't think You're going to see a recession declared

Okay okay and again this indicator does Not suggest we're in a recession once we Cross that half percent threshold then It would suggest you're in a recession Once that occurs it's been a pretty a Pretty good idea to start thinking about Okay what's a major bottom potentially On the S P 500 where could that be Um so you can start preparing for the Next phase of economic expansion if you Guys like the content make sure you Subscribe to the channel give the video A thumbs up remember to check out into The crypto versus premium at into the you can find a link to That down in the description below we do Have several different tiers one of them Is free make sure you check it out I'll See you guys next time bye


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