[New York Diary] Off-Target Recession Forecasts... Buckle Your Seatbelt

Stories from Everyday Life in America, Straight from New York

"In recent years, every time I meet someone, I get asked when the recession will come. I suppose I will have to talk about that for the rest of my life."

Ahead of the 2024 New Year, Claudia Sahm, a macroeconomist whom I met via video call, added this with a wry smile at the end of the interview. The reason such questions pour in even in private settings is simple. While the heightened economic uncertainty since the pandemic may be a factor, it is primarily because she is the person who devised the 'Sahm’s rule.' Introduced in 2019, Sahm’s rule uses the unemployment rate to detect recessions in the U.S., and it has been validated in all past recession cases since 1970.

Dr. Sahm’s remark came after finishing all prepared Q&A and following a personal question about whether there was a behind-the-scenes story in creating Sahm’s rule. She shared her past experience working at the Federal Reserve (Fed) as an expert in consumer spending and fiscal stimulus, explaining that she wanted to create a kind of 'automatic stabilizer' that could implement effective stimulus measures immediately during a recession. She said there was a need for a kind of benchmark for applying stimulus policies. She also expressed concern and caution about the recent market tendency to regard Sahm’s rule as a 'recession litmus test' that could replace the long-short term interest rate inversion phenomenon.

[Image source=UPI Yonhap News]

However, the New Year is inevitably a time when questions about 'Will a recession come?' arise, both as a macroeconomist and as the creator of Sahm’s rule. In this interview, Dr. Sahm emphasized that the U.S. economy will achieve a soft landing in 2024 but did not rule out the possibility of unexpected variables. She said, "Bad things can happen at any time." When asked about economic risks this year, she reiterated, "I expect a soft landing for the U.S. economy, but since nothing is absolutely certain, it is important to consider risks."

This cautious elaboration seems related to the fact that experts’ economic forecasts were completely off a year ago. Predicting recessions is never easy. Past cases often show that sudden recessions hit economies that were previously sailing smoothly. The New York Times (NYT) cited late 1989, late 2000, and late 2007?times when a soft landing was taken for granted?as representative examples. At those times, optimistic economic forecasts were abundant among Fed officials and experts, but within weeks or months, the U.S. economy plunged into recession.

Jamie Dimon, chairman of JP Morgan Chase and known as the 'Emperor of Wall Street,' said a few months ago, "The Fed’s forecasts were 100% wrong," urging preparation for all potential scenarios. Thomas Barkin, president of the Richmond Federal Reserve Bank, who holds a vote on interest rate decisions this year, also said last week, "Forecasting is difficult, and conditions always change," adding, "Buckle your seatbelt. Even if a soft landing is expected, that is the appropriate protocol."

Moreover, 2024 is an 'election year.' At least 65 countries worldwide are holding elections this year, including the Taiwan presidential election on the 13th, which could affect U.S.-China relations, as well as elections in India, Indonesia, Pakistan, Venezuela, Mexico, Russia, and the European Union (EU) Parliament. Of course, the place attracting the most global attention is the United States, which is preparing for the presidential election in November.

In the midst of growing uncertainty, a turbulent year begins as politics shakes the economy. The Eurasia Group, a U.S. political consulting firm, also issued a timely New Year warning: "In a year of the most intense democracy the world has ever seen, buckle your seatbelt." Everyone is looking for their seatbelt.

This content was produced with the assistance of AI translation services.