1 The Sahm rule tracks the unemployment rate. It states that if the three-month moving average of the U.S. unemployment rises more than 50 basis points from its low point over the last year, the U.S. economy is already in recession. This indicator had a sterling track record for decades leading up to its “triggering” by rising unemployment in July 2024.
2 The unconditional odds are based on data from 1985 to the present.
3 Chinn, Minzie. “The Debt-Service Ratio and Estimated Recession Probability,” Econbrowser. September 22, 2023. https://econbrowser.com/archives/2023/09/the-debt-service-ratio-and-estimated-recession-probability
4 In large part, the slow rise in debt service of late has been due to the private sector’s shift away from floating-rate debt and toward long-duration, fixed-rate debt during the prior cycle of the 2010s and during the pandemic.
5 For example, Russia’s invasion of Ukraine in 2022 caused a large commodity price and uncertainty shock to hit the global economy. However, this shock did not push most national economies into recession because economic momentum was strong at the time of the invasion.
6 The Philly Fed State Coincident Indexes are economic indicators developed by the Federal Reserve Bank of Philadelphia. These indexes are updated monthly and provide a snapshot of economic activity in each of the 50 U.S. states. Each state’s coincident index combines four state-level indicators: nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements.
7 We discussed the negative feedback loop between layoffs and consumer spending more completely in an article we published last fall. Seydl, Joe, “Why this economic cycle is defying history—and breaking the rules,” J.P. Morgan Private Bank. September 20, 2024. https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/why-this-economic-cycle-is-defying-history-and-breaking-the-rules
8 Seydl, Joe. “Is the deficit threat being overhyped?,” J.P. Morgan Private Bank. December 9, 2024. https://privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/is-the-deficit-threat-being-overhyped
9 To be sure, this risky asset vector is prone to rapid moves. However, we’ve constructed this model output to react only to large market movements—not typical market volatility. This model shows that absent other factors, the average time between market downturns is 22 quarters. The last market downturn was in 2022, about 10 quarters ago.
10 We pursue this approach, rather than putting all the variables into one regression equation, to avoid multicollinearity, especially given the sample size is low (only 150 data points). The trade-off will be that all the variables will be weighed equally in the averaging approach we pursue, but as we explain next, we toggle with including and excluding certain variables (e.g., the Treasury curve variables) as a robustness check.
11 Excluding the COVID-19 recession, as that was caused by an exogenous shock (a national health crisis), as opposed to a dynamic intrinsic to the business cycle.
12 Two potentialities we are monitoring closely are an escalation in tariffs and trade frictions under the new U.S. presidential administration, as this could inflame a global trade war, and we are watching the risk related to a military conflict involving Taiwan. On the latter, the St. Louis Fed recently published a paper on the consequences of a military conflict over Taiwan, coming to the conclusion that this would produce a severe economic shock to global trade with enormous human and physical capital costs. https://s3.amazonaws.com/real.stlouisfed.org/wp/2024/2024-034.pdf
