Odd Lots - Lots More with Claudia Sahm

Episode Date: January 30, 2024

This week on Lots More, we speak with Claudia Sahm, the former Federal Reserve economist and founder of Sahm Consulting, about the recent uptick in the US unemployment rate. We discuss the implications for the Sahm Rule, the early recession indicator she discovered and which has been a hot topic since the most recent Nonfarm Payrolls report. We also talk about data challenges for economists, the prospect of recession, and dealing with online commenters.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. I was just saying to Joe, I'm annoyed that we didn't go to the Freight Waves Conference this year because they had a puppy playpen, just like a bunch of puppies at this conference. And we went last year and they did not have puppies. Yeah, no, we had some like work thing. The one, there's a board group that's over and International Square, which is not like in the Fed complex. And they did. They had a day where they had all this stuff for the people in the building, and one was a puppy playpen. So this is a new thing. Adults need like puppy playpenes at events to be entertained. Sorry. Why not? Wait, food trucks and puppies, preferably ones that are up for adoption, you know, from animal shelters. And you have the

complete, the ideal conference, in my opinion. I did a deadlift. One, two, three. Hedgeimony. Hedgedemone. Okay, good. Okay. What too? GEMony.

Barges. This is an after-school special, except... I've decided I'm going to base my entire personality going forward on campaigning for a strategic pork reserve in the U.S. Where's the best with ink pasta? These are the important questions. Is it robots taking over the world? No, I think that, like, in a couple of years, the AI will do a really good job of making the oddlots podcast. And people will say, I don't really need to listen to Joe and Tracy anymore.

We do have... The perfect guest. Well, in the meantime, this is lots more. A weekly chat about whatever is on our mind. We are speaking with Claudia Somm, the former Fed economist who now has her own consultancy, SOM consulting. Claudia, it's good to talk again. It's been a while.

Yeah, no, it's great to be on. I really appreciate it. I have a really important question, which is, do you get tired of having to convince people that you do, in fact, know how the SOM rule actually works. The rule that's named after you. Yeah, no, men are fascinating. Like, I, you know, I agree. It's, it's interesting. I have people that ask me, like, they can't quite, you know, match it so they email me very politely. We can, you know, because it's like, details matter, right, exactly what average you're taking and stuff. But the people who try to explain to me that I've

calculated it wrong, it's like, and then get really not happy with me when I don't agree with them. And Just, anyway, so that's, I guess, just part of, I mean, I'm glad they're touching data. They clearly don't know what to do with it, but it's good. Can we run a Bloomberg headline, some, colon, men are fascinating? I think that that can be one of those Bloomberg red headlines, I think, that goes across the wire when this comes out. Yeah, you should ask my editor, Bob Burgess, the Bloomberg opinion, if I can write that piece. I'm not sure he'll green light that one. I bet we could get that commission.

Yeah, maybe. You know, a lot of our listeners started listening to us, sort of like 2020 the pandemic era. But we had Claudia on, I think in January or February 2020, before COVID had just sort of talking theoretically about this idea of, okay, what are these indicators of recession, et cetera? And then it was literally six weeks later. And we're like, oh, what we were talking about theoretically six weeks ago. And now we have to talk about real. So here we are. I don't think we've had you, I don't think we've had, I don't think we've chatted with you since then, though.

Yeah, no, I show up when the world is craning towards the cliff. So I, you know, I'm happy to be helpful and, you know, we can do good policy, we can do it better. And yet it is not cheerful when I start getting press calls, lots of press calls. I remember, though, that was actually an incredibly prescient conversation in many ways, because we did talk about the Psalm rule. And we should maybe mention on this podcast what exactly it is. But the whole idea of the Psalm rule was that it would be. an early indicator of recession so that policymakers would be able to actually start doing something about impending economic contraction. And I think people kind of forget about that now. Right. Like you said, the Somo, it's a recession indicator. So it doesn't forecast a recession, but very early in a recession way before like the NBR would call the recession, way before we'd even have a lot of information on GDP, this unemployment rate should tell. we're in a recession, let's get going. And there are certain things that Congress does in almost every recession,

though I'm not holding my breath if one comes soon, with sending out stimulus checks, enhancing unemployment benefits, maybe getting money to communities. So just tie it to an economic indicator. I think the other thing that's important with the stimulus checks, which should be a lesson from this last cycle, is you can ahead of time determine how big should they be, who should they go to, and if we should repeat, them, right, and how big they should be if you repeated them. Because you can absolutely see the politics that got wrapped into the stimulus checks and not a lot of guidance, right, in terms of exactly when should we do it, how much should we do it after the initial response. So yes, I think taking the politics out of the things we always do and then let Congress focus on

what's new in that recession. Yeah. So speaking of what's new and kind of going back to the men are fascinating topic. But I think one of the controversies with the discussion around the Somm rule right now is you've said that, you know, in some respects, this is kind of a backward-looking empirical measure. So the SOM rule has happened for previous recessions, but that doesn't necessarily mean that it's going to happen this time around. And I saw one guy on Twitter slash X who just was furious that you were sort of like doubting your own rule. And it was just hilarious to me because, you know, who knows better about the limitations or the possibilities of this particular theory than its actual creator? And yet this guy was like, I don't understand why you're

not into your own rule. Why would you doubt it? Yeah. No, I had someone last night told me I was having an identity crisis. And someone else, I mean, and I've got an emails. I think well-intentioned ones of like, you're being too self-deprecating and you're, you know, and it's like, no, no, no. See, I'm just, I'm being honest here, right? This is an empirical regularity. It's a pattern. That's true of every single model, every single indicator forecast that we have in macroeconomics. They're all trained on the past.

And this present has been really unlike the past. Yeah, I mean, that makes it a ton of sense, right? All these different models have broken apart, this current cycle, almost like nothing else that we've seen, so it's good to have some humility about whether things that empirically seem to be true in the past. But what do you, since you said, you know, when your phone is ringing off the hook, that's usually a sign of maybe things are going wrong. And it does happen to be true that the unemployment rate has ticked up to 3.9 percent. Earlier in the year, it was 3.4%. 3.9% happens to be the highest since January 2022. So it's obviously caught people's attention. It's not

necessarily recession, indicate recession sign yet, but it's real. What do you just, for the sake of listeners, et cetera, situate the current unemployment trajectory within the context of your rule? Okay. So it's just so we don't dance around what is this rule. Yeah. Yeah. What's the rule and where are right now? Yeah. Yeah. So we take the monthly unemployment rate. We take a three month moving average. I mean, if you look at the data, things bounce around. Even the unemployment rate that's pretty well measured, it bounces around. So you take three-month average. You compare in that series, you compare the current data point with the lowest over the prior 12 months. If you see an increase of a half a percentage point or more, we are in the early months of a recession. That indicator,

the Somerul has been highly accurate since the 1970s. It's triggered in every recession. It is not triggered outside of any recession. You go back to World War II. It's really pretty good. There are some places where it does trigger outside of a recession. And as you said, the unemployment rate has been rising. If you look, you do not need my rule to tell you it has been rising, you know, since the middle of the year. The Psalm rule is currently at three-tenths, so it is short of its trigger. That three-tenths is not a good sign, right? Like, there are more people out of jobs that need are looking for jobs and it it's often it does go into a recession once the unemployment but not always right like this is not uh we're not in the we're over the cliff stage of this

but if you look just at the monthly unemployment rates they're up a half a percentage point so i've had to a lot of education about the som rule right like people get the half a percentage point trigger in their head but like that's not for this rule right like and it is like I said this is not a good sign. One of the things that has frustrated me, both with the inflation debate, and now what I'm seeing with unemployment, is we got to look under the hood here. Like, why are things moving around the way they are? And it's the case that we finally in the labor market have really seen the supply of workers, you know, the people that want jobs coming back. And at the same time, we've seen the pace of hiring slow down. The job gains we're seeing every month slow down.

They're still good. But we're in the space of now we've got more workers and the jobs have to catch up with them. Whereas when we were in labor shortage world, it was turned around. We had all these jobs and the workers had to catch up. So to me, it's like that's the story. Because otherwise, like if this were a demand-driven recession, a demand-driven recovery, a demand-driven, inflation, then the logic of once the unemployment rate gets going, it keeps going. Right? You've got to have, you've got to have a story here. And one that is grounded in reality. Those are the best stories. At least if you do macro. Speaking of macro, Tracy, you and I, we went to separate parties last night. We went to separate

events. Yes, you abandoned me again. The second time. You were supposed to come with me. And then you were like, oh, oops, I RSVP for something else. I double booked. I'm sensing a pattern here. Of ditching Tracy. No, but this came up, and so I was at this sort of cocktail thing that Rick Palacios and previous lots more guests, Neil Duda, we're at. And some of this question came up about, okay, the rise in the unemployment rate, how much,

how much is this due to weakening demand for labor versus how much is this due to increase supply of labor, people coming off the sidelines? The one thing that seems to be true, as he pointed out, and I thought this was sort of a good thing to think about, is that either one of the stories, whether it's about, slowing demand for labor, increased supply, probably going to depress the state of wage growth, which is if you're the Fed, probably something you want to see, regardless, in part of feeling confident that the inflation problem is getting close to being solved. Wait, just going back to reality, I actually have a personal anecdote on this,

which is my mother retired during COVID, and she is now unre retired, and she's back in the workforce as of about a month ago. When is she coming out on odd life? Why did she? Yeah, we got to get the story there. Wait, Claudia, can I ask, did you see this morning? So Brent Donnelly, another Oddlots guest, he published a sort of modified Psalm rule that was based on initial claims instead of the unemployment rate. And it looked kind of interesting. I don't know if you've had a chance to look at it yet. Yeah. Brent actually sent me his piece ahead of time to make sure he was characterizing the Psalm rule correctly.

Oh, nice. So some men are smart about how they do this. So, yeah, no, I. So I got a preview of the piece. Yeah, it's really interesting. The context of the Psalm rules, it was designed as we were talking about it for the automatic stabilers and the fiscal policy. It needed to be simple. Like this, it's supposed to be like in legislation. It's something everyone follows.

And it's a well-measured kind of stable creature. Right. So I never thought I was going to get in the business of, are we in a recession? I was supposed to be about now we help people, right? So in any case, I'm happy to, you know, be useful as I can. So I've always said it's entirely possible that you end up with there are better indicators of recessions and better in the sense that, I mean, mine's highly accurate, but a better would be like signaling it even sooner. Right. The somer usually triggers, you know, two to three months inside of a recession.

You could nail it right on day one. That'd be super. Claims, we get claims weekly. It's faster moving. I never looked at claims. I mean, having been at the Fed and following data, all these kind of data before I left, claims, I just don't feel comfortable using a data series where actually deer season can cause strange aberrations in the data to the point. Department of Labor has to publish that, like in the little header.

Oh, my God. So this is people, what, taking off time from, I did not. Yeah, more often you'll see, like, plant closures, like in the auto industry, there's regular closures at certain times of the year to do maintenance. So that's a more typical one to show in the headline. But years ago when I was at the Fed, there was one on deer season in Michigan because, you know, these are monthly things. But it's extremely timely.

It's something absolutely to follow. Like I keep an eye on it. I mean, came out today, right? You know, and it does tell us something. So I wasn't, and I've had other friends who have, you know, push claims as a way to do this, I think that's fine. It makes a lot of sense to me. You know, and the forecasting, I mean, heck, if we still use the yield curve to say anything about a recession coming, I would feel much more comfortable having something claims in, you know,

in the labor market space. Just because, you know, I've said, like, the labor market is so central to this recovery, any recovery. It's been really strong. Most Americans spend their paychecks. As long as they still have jobs, they're still out there. spending, if they're unable to spend, like, we're done, right? There's 70% of the economy. So you have this change. So to me, thinking about anything tied to the labor market as an early indicator, it makes so much sense. The other thing that I find to be very powerful about this idea and the importance of trying to capture something that happens early in the recession, is that one thing that you just see, and Alex Williams over an employee America has

talked about this as well, and obviously it informs some of the core logic of what we're working on is once it gets going, the rise in the unemployment rate, it really gets moving. And so maybe 3.3.3.3. It's still below 4%. That's really good. But historically, like, once it gets going, you know, you'd expect it to seriously, if the recession starts to snowball, it could go to 6 or 7% very fast or in a fairly short period of time. And so the idea, you, I guess, you know, in the dream world of rules-based fiscal automatic stabilizers, that seems like the process that you really want a short circuit. Yeah, no, and I mean, over in the monetary policy side, too. Yeah, right, of course. I mean, they, you know, at the Fed, getting ahead of it would be more, would be ideal,

not waiting until we're in it. And to your point, the, you know, looking at the kind of recent set, like since the 70s of recessions, the mildest one, so 2001, you saw a two percentage point increase and the unemployment, or two percentage point increase, the unemployment rate. So that would put us well above five. And the typical increase is more like four percentage points or close to four. So, yeah, I mean, if anything you can do to, well, if you can short circuit the cycle, that's amazing. If you can tamp it down, right? And the sooner you get out relief, whether it's from the Fed or from Congress, the better chance you have at softening the blow, decreasing the hardship and like making this not one of the bad ones.

Can I get your view on something as an economist and someone who is sort of dealing with data on a day-to-date basis? I have this pet theory and I'm kind of in the early stages of actually seeing if it's true or not. This is the way journalism works, but it's intuitively attractive to me. But the idea is that a lot of the economic data that we have now, which is, you know, de facto aggregate isn't as informative because the sort of distribution within those indices is a lot more extreme maybe than it used to be. So a classic example would be if you look at the Michigan survey of consumer sentiment, you look at the aggregate number, but of course if you break it down by Republicans or Democrats, they're going in. in almost completely opposite directions. And I have a feeling that that might be the case for a lot of different things right now, but I haven't actually started breaking down the data to see if it's true or not.

So I guess my question is, like, how reliable are a lot of these aggregate figures at the moment? Or is there really a difference in the way we're measuring the economy or the suitability of economic data for the post-COVID economy versus how we were doing things before? for. Right. You're absolutely on to something. And it goes in the category of know thy data. Like who is in this and how are we measuring? So something like the unemployment rate or the Michigan survey sentiment, which I'm a huge fan of too. Every single person counts the same, right? Like these take all the people that are surveyed, take an average. And you can get more detail, whether it's in the household survey that goes into the unemployment rate or the Michigan survey that's got individual

respondents, right? So you can do a lot, and there everybody, everybody is equal. If you go into something like GDP, inflation, consumer spending, there, we don't all count the same, right? Like, even with inflation, which I think that's one where people kind of miss this one more, inflation is like, what is the price of the shopping cart? This month versus last month, some people put a lot more to the U.S. shopping cart than others, right? So they're represented. Now, thankfully, and this has been, because the concern that you raised is one that's out there, right, like for years when I was at the Fed, because I worked on consumer spending. It's like, okay, let's think about the distributions. And there were times where some patterns were not holding up an inequality on what, like, looked like it could

have been doing something. Like, the wealth effect has really moved around in strange ways, not strange necessarily, but so there's an awareness of this. And I give huge kudos to some of the official statistical agencies and that we have so much more data on the distribution. All of my academic style research is using household micro data, but I'm always using it to answer macro questions. So I'm a big fan of taking the micro up to the macro and the macro down to the micro, like in terms of conversations. And there's a lot more data like that. I'll give, you know, a shout out to the Fed because it's one of my favorite data says to go look at. For a long time, they've published the financial accounts or what was called the flow of funds

before that had all these different pieces of wealth in the economy quarterly. And now they also publish the distributional financial accounts. They use the survey of consumer finance, switch the household survey to split apart quarter by quarter on the household side, who's got this wealth? And it's absolutely fascinating. And it's one where you can see these distributions and how much they've expanded. I mean, the reality is the United States has been a very unequal country for quite some time. But you do have to think about when you're doing the macro,

how things could be spreading out and leading you astray. And yet you can look out at the recovery now. I've had a lot of people be like, oh, this is just the rich and the poor. It's like, no, no, no. See, this has been good, not for every single person, but up and down the distribution. Like, this is not normal for a recovery in terms of how much people, you know, bottom half of the income distribution. Like, they're in a better place than they were going into COVID. Yeah, actually, just on that note, and this kind of goes against my very half-formed thesis at the moment.

But I think there was a paper from the Boston Fed that looked at, excess savings or just personal savings post-COVID to see whether or not, A, you know, savings were coming down, but B, whether or not lower income households were burning through their savings faster than wealthier households. And they found that I think it was pretty much even keel. Like everyone was kind of reducing their savings at the same rate, which was somewhat surprising to me, but kind of speaks to your point about how kind of unusual this recovery has been in that it has benefited lower income households. I don't want to say as much as wealthier households,

but like you have seen that effect. Absolutely. I mean, in an unprecedented way. And it's very heartening, right, to see this. Now, I, okay, so I understand the exercise. I have found excess savings to be somewhat not offensive, but it's bothered me. Because first of all, just the, I'm very big on labels,

which is not normal for a macroeconomist, but it's like excess savings. especially when you talk about the bottom. It's like, you know what? If I had to pick who's got the excess, it would not be at the bottom, right? What is the definition of excess savings? I've never actually thought about it, but like what determines the excess? I'm glad you say this, Claudia.

I've never understood this. So I'm curious your answer to this question. Yeah. So how people define the reference point varies some across the research paper. It's usually something in the space of what was the wealth before or the savings before COVID. And here savings is usually like what's in your checking account, what's a mutual fund, like things you could get too quickly. Okay, so some people, it's like more of a just before COVID. Most of the time, it's like some trend, right?

Like how savings was growing, you know, because it goes with income and whatever. Anyway, so they've got this kind of trend line. And it's simply comparing, okay, how much savings do these groups have relative to where we would have thought if COVID had never happened, right? And so what's been fascinating, this later, everybody's got an estimate of this thing, that, you know, oh, there's more, there's more. And I can remember having a conversation, this was 21 or maybe early 22, where everybody, even the administration, was talking about, well, when the excess savings is gone, the inflation will come down. And I'm just like, this is not something to wish for here in terms of the savings. You want people to have a buffer. and I was talking with one macroeconomist,

and this just shows some of the biases of my tribe, was just shocked that the savings was still there. Because in most of our models, people who don't have wealth, the way we model that is they have no impulse control. They're not patient. And I was telling this person, it's like, you know, maybe they just don't have income to save.

Like, most people want a little bit of a rough. It's hard to save if you don't actually have any money. Yeah. And so that's what, because, I think what's missing all these excess savings, it's not just those stimulus checks we got years ago. Isn't it like the paychecks are bigger? Yeah. It's so interesting because I guess people moralize savings so much, right?

This is this idea of, oh, it's a lack of impulse control. If we're just better people, then we would have more savings. Of course, it makes no sense because if we saved more than that's less income for someone else, theoretically crimps their ability to save. but the moralization comes so clear when people start talking about savings. Two quick things. I really like your point about data. I guess because I'm getting old.

Occasionally people now more and more in my life reach out to me for career advice and financial journalism, which is something I've noticed in the last couple years. I guess it's a sign that, like, I'm a gray beard in this space. But I always say that just get to really know a difference. data point. All the smartest people I feel that Tracy and I talk to. Actually, I would say there's two categories of people that I'm always impressed by. People who really understand how banks work, seriously, are consistently a cut above, and people who have really spent time understanding what a data point is actually saying and how it's collected and what's underneath the guts, as opposed to

just sort of shooting from the hip, from what the headline says. So I strongly agree that. One other thing, I just want to say, you know, we have this discord. where we chat. And I went in, I said, does anyone have any questions for Claudia? We're having her on lots more. And there actually haven't been a lot of questions, but you are getting a lot of praise in there. Someone says, Claudia is great if you ever want to stare into the mouth of madness. Check her replies on Twitter. Yes. Another person says, you'll see enough mansplaining to drive a person to drink. Another person says, R over G says, you're in the arena trying stuff. successfully. Another person says, nothing but respect for real heroes, the people who EJMR hate,

and I know that's an entire separate world of, my understanding is it's sort of basically 4chan for economic students. Anyway, many big fans of yours in the Discord and particularly the way you deal with people on Twitter. So I just want to just like that. That's good. And I've tried to pace myself some. Like you can't fight every battle. So I think I've been doing better this year on Twitter. It takes so much patience and so much emotional energy. And I really don't think, sorry, this is going to be me ranting for a second. I don't think guys get it really. And speaking of data, Joe, this is actually interesting. I once did a spreadsheet on Twitter replies to very similar tweets that we both put out. It was about Bitcoin being an inflation hedge. So you can imagine what it was.

And you said something that was like very similar to what I said. And I thought because these tweets are quite similar, it's a really good test case to see and gauge the amount of abuse that each one gets from Cryptobros on Twitter. And I can tell you like sheer volume, I got multiples of what you did. But the other interesting thing was the insults themselves varied. So most of yours were calling you stupid. and most of mine were just ad hominem attacks, either, you know, like attacking what I look like or just calling me names, which I also thought was interested. Anyway, so, you know, data analysis. Data analysis.

Yeah. No, and I will say, too, I mean, one of the things that I, I do a lot of macro and policy, I am very passionate about economics becoming more diverse. And especially in the policy world, that's my space. or is it at the Fed and White House and all that. And there's an aspect of me trying to be out there just as an example, right? It's really hard to get that kind of abuse. And it can get in your head. Or at least it gets in mind sometimes.

But I do want people to see, and not just other women, like, you don't have to do this, like the rest of the macro bros, right? Like, we each have our style. But I tried to, and I've had students come up to me. Like, it's very encouraging. And, you know, so hopefully those that come after us won't have. to deal with that kind of abuse, or at least less and less of it. But yeah, go team here.

Lots more is produced by Carmen Rodriguez and Dashel Bennett with help from Moses Anda. Our sound engineer is Blake Maples. Sage Bauman, who's our head of podcasts. Catch you next time for lots more. Thanks for listening. That's it. Cool. You got half an hour until the next one.

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