MiB: Identifying Recessions in Real Time
Recessions are typically identified by the National Bureau of Economic Research months if not years after they begin. This is of little assistance to policy makers who need more timely information to formulate responses to economic contractions.
Enter the Sahm Rule: Created by Claudia Sahm, a former Section Chief at the Board of Governors of the Federal Reserve System, and Senior Economist at the Council of Economic Advisers for the Obama Administration, she developed an indicator to identify recessions in real-time.
Her signal is when the 3-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points (or more) relative to its low of the previous 12 months. She developed the rule by spending weekends playing with spreadsheets to find the most accurate combination of indicators that was timely but did not generate false signals.
Sahm is an expert on the impact of fiscal stimulus, and this led to her work trying to determine when recessions began sooner they we had been doing.
We also discuss economics research replication problem, raising issues about the quality of research. She believes the field needs to broaden out what it considers valid research topics, including issues of poverty, race and gender issues.
Her blog post, “Economics is a Disgrace” ignited a firestorm about problems in the profession, specifically, a “lack of diversity and inclusion degrades our knowledge and policy advice. We hurt economists from undergraduate classrooms to offices at the White House. We drive away talent; we mistreat those who stay; and we tolerate bad behavior.”
She spends most of her time reading economic journals and Econ-Twitter; A transcript of our conversation is available here.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Overcast, Google, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.
Be sure to check out our Masters in Business next week with Mandell Crawley, head of Private Wealth Management for Morgan Stanley.