“I don’t read economic forecasts. I don’t read the funny papers”. – Warren Buffett
“The track record of economists in predicting events is monstrously bad. It is beyond simplification; it is like medieval medicine”. – Nassim Nicholas Taleb
“The good news is that economists are intelligent, engaging and often charming folks. The bad news is their work is often little use to investors”. – Barry Ritholtz
As long-time readers of our Weekly know, we’re not fans of economists. First and foremost, they should never be confused with investors – although many do. Economists tend to live in the past, and investors are looking toward the future. Perhaps if economists had some skin in the game, they’d be more measured with their proclamations. Many seem to be well versed on economies and academic studies from decades ago but fail to acknowledge and adapt to a changed landscape. Lastly, many sift through stale economic data and spot data patterns that they then claim have predictive value. However, their “failsafe” recession indicators are being busted, one by one, including inverted yield curves, declines in temporary employment, and back-to-back GDP declines. We’ve seen many fall in recent years – yet here we are.
Is the “Sahm Rule” the next “recession indicator” to fail? The person who created it thinks so.
The Sahm rule was created by economist Claudia Sahm in 2019. In other words, it was created after studying past recessions (or “ex post facto” for our fellow economists) but has yet to predict any. It states that when the three-month average US unemployment rate rises by 0.5% or more from its 12-month low, a recession is underway. The idea is that a small rise in job losses is a preamble to larger ones.
The “Sahm Rule” was triggered during the last US jobs report on August 2nd. This caused extreme excitement among permabears and recessionists, touting its “perfect” track record since 1970 (a key qualifier since it failed to predict the one in 1969). However, many believe that it’s a false positive – including Claudia Sahm herself. In fact, she wrote in 2022 “The Sahm Rule is a historical pattern, not a law of nature”. Essentially, people that stepped away from the workforce during the pandemic are now coming back. She feels that this normalization is causing the unemployment rate to rise. It’s from increased supply –not plunging demand.
As we’ve written before, the aftershocks of the pandemic are still being felt with parts of the economy being put on a different cadence than others. Much of the “real” economy was shut down for months while the digital economy prospered. That reversed sharply in 2021 and then again in 2023. Very little seems to be synchronized. We’re no longer on a single business cycle.
Despite our distaste for economists, Claudia Sahm might be our favorite. Her past articles are titled:
“The Sahm rule: I created a monster”.
“Why My Recession Rule Could Go Wrong This Time”
“Economics is a Disgrace”
Even during the best of times, there’s always a chance that a recession may be around the corner. However, there’s a big difference between “possible” and “probable”. Instead of relying on economic data patterns and past “rules”, we’ll trust what companies are seeing on the ground level, which continues to be encouraging.
The opinions expressed are those of Harrison Financial Services as of August 22, 2024 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Please remember that all investments carry some level of risk, including the potential loss of principal invested.