This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
I have listed 4 ways to access whether a U.S. recession in underway. I list the 4 U.S. recession methods, in order of their popularity — as this is tracked on the FRED website.
(1) Real-time Sahm Rule Recession Indicator (Currently at 0.43, under 0.50 threshold)
The Sahm Recession Indicator signals the start of a U.S. recession, when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more, relative to the minimum of the three-month averages from the previous 12 months.
This indicator is based on "real-time" data. That is, the unemployment rate (and the recent history of unemployment rates) that were available in a given month.
The U.S. Bureau of Labor Statistics (BLS) revises the unemployment rate each year at the beginning of January, when the December unemployment rate for the prior year is published.
Revisions to the seasonal factors can affect estimates in recent years. Otherwise, the unemployment rate does not revise.
A salient 2024 U.S. labor market dynamic: “Effects of the Immigration Surge on the Federal Budget and the Economy," done by Congressional Budget Office, July 2024.
The CBO wrote:
“The net immigration of other foreign nationals over the 2021–2026 period is 8.7 million people greater in CBO’s baseline projections than it is under the counterfactual scenario in which the net immigration of people in that category equals 200,000 people annually.”
(2) Smoothed U.S. Recession Probabilities (Currently a low 1.02% probability, but rising)
Smoothed recession probabilities for the United States are obtained from a dynamic-factor Markov-switching model, applied to four monthly coincident variables:
- U.S. Federal non-farm payroll employment
- The index of industrial production
- Real personal income excluding transfer payments, and
- Real manufacturing and trade sales
This model was originally developed in Chauvet, M., "An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, 1998, 39, 969-996.
(3) NBER based Recession Indicators for the USA (Currently at 0, no recession)
Note: Yes! U.S. recessions, documented by the NBER, are much less frequent, now.
Back in time, the passage of the Federal Reserve Act in 1913, the Federal Reserve Act of 1934, and the Glass-Steagall Banking Act of 1933 made a difference.
The number of recessions in the United States has decreased since the 1960s, due to a better understanding of their causes, and the adoption of policies to prevent them:
Policymakers' understanding
Policymakers have gained a better understanding of the causes of recessions, and have adopted policies to prevent them from deepening into depressions.
Macroeconomic theory
Macroeconomic theory has evolved to include the importance of public expectations and time-consistent policy choices.
Central bank policies
Central banks, including the Federal Reserve, have adopted numerical inflation targets to increase the transparency of monetary policy decisions.
This time series is an interpretation of US Business Cycle Expansions and Contractions data provided by The National Bureau of Economic Research (NBER) at http://www.nber.org/cycles/cyclesmain.html.
The NBER identifies months and quarters of turning points without designating a date within the period that turning points occurred.
The dummy variable adopts an arbitrary convention that the turning point occurred at a specific date within the period. The arbitrary convention does not reflect any judgment on this issue by the NBER's Business Cycle Dating Committee.
Our time series is composed of dummy variables that represent periods of expansion and recession. A value of 1 is a recessionary period, while a value of 0 is an expansionary period.
For this time series, the recession begins on the 15th day of the month of the peak and ends on the 15th day of the month of the trough. This time series is a disaggregation of the monthly series.
The recession shading data that we provide initially comes from the source as a list of dates that are either an economic peak or trough. We interpret dates into recession shading data using one of three arbitrary methods. All of our recession shading data is available using all three interpretations. The period between a peak and trough is always shaded as a recession. The peak and trough are collectively extrema.
Depending on the application, the extrema, both individually and collectively, may be included in the recession period in whole or in part. In situations where a portion of a period is included in the recession, the whole period is deemed to be included in the recession period.
The first interpretation, known as the midpoint method, is to show a recession from the midpoint of the peak through the midpoint of the trough for monthly and quarterly data.
For daily data, the recession begins on the 15th of the month of the peak and ends on the 15th of the month of the trough. Daily data is a disaggregation of monthly data. For monthly and quarterly data, the entire peak and trough periods are included in the recession shading.
This method shows the maximum number of periods as a recession for monthly and quarterly data. The Federal Reserve Bank of St. Louis uses this method in its own publications.
The second interpretation, known as the trough method, is to show a recession from the period following the peak through the trough (i.e. the peak is not included in the recession shading, but the trough is).
For daily data, the recession begins on the first day of the first month following the peak and ends on the last day of the month of the trough. Daily data is a disaggregation of monthly data. The trough method is used when displaying data on FRED graphs. The midpoint method is used for this series.
The third interpretation, known as the peak method, is to show a recession from the period of the peak to the trough (i.e. the peak is included in the recession shading, but the trough is not).
For daily data, the recession begins on the first day of the month of the peak and ends on the last day of the month preceding the trough. Daily data is a disaggregation of monthly data. A version of this time series represented using the peak method can be found at:
https://fred.stlouisfed.org/series/USRECDP
The OECD also offers a similar recession indicator series for the USA.
(4) GDP-Based Recession Indicator Index (Currently a low 2.4% probability)
This index measures the probability that the U.S. economy was in a recession during the indicated quarter.
It is based on a mathematical description of the way that recessions differ from expansions.
The index corresponds to the probability (measured in percent) that the underlying true economic regime is one of recession based on the available data.
Whereas the NBER business cycle dates are based on a subjective assessment of a variety of indicators that may not be released until several years after the event, this index is entirely mechanical, is based solely on currently available GDP data and is reported every quarter.
Due to the possibility of data revisions and the challenges in accurately identifying the business cycle phase, the index is calculated for the quarter just preceding the most recently available GDP numbers.
Once the index is calculated for that quarter, it is never subsequently revised.
- The value at every date was inferred using only data that were available one quarter after that date and as those data were reported at the time.???
- If the value of the index rises above 67% that is a historically reliable indicator that the economy has entered a recession
- Once this threshold has been passed, if it falls below 33% that is a reliable indicator that the recession is over.
Image: Bigstock
4 Methods to Watch for a U.S. Recession
This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
I have listed 4 ways to access whether a U.S. recession in underway. I list the 4 U.S. recession methods, in order of their popularity — as this is tracked on the FRED website.
(1) Real-time Sahm Rule Recession Indicator (Currently at 0.43, under 0.50 threshold)
The Sahm Recession Indicator signals the start of a U.S. recession, when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more, relative to the minimum of the three-month averages from the previous 12 months.
This indicator is based on "real-time" data. That is, the unemployment rate (and the recent history of unemployment rates) that were available in a given month.
The U.S. Bureau of Labor Statistics (BLS) revises the unemployment rate each year at the beginning of January, when the December unemployment rate for the prior year is published.
Revisions to the seasonal factors can affect estimates in recent years. Otherwise, the unemployment rate does not revise.
A salient 2024 U.S. labor market dynamic: “Effects of the Immigration Surge on the Federal Budget and the Economy," done by Congressional Budget Office, July 2024.
The CBO wrote:
“The net immigration of other foreign nationals over the 2021–2026 period is 8.7 million people greater in CBO’s baseline projections than it is under the counterfactual scenario in which the net immigration of people in that category equals 200,000 people annually.”
(2) Smoothed U.S. Recession Probabilities (Currently a low 1.02% probability, but rising)
Smoothed recession probabilities for the United States are obtained from a dynamic-factor Markov-switching model, applied to four monthly coincident variables:
This model was originally developed in Chauvet, M., "An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching," International Economic Review, 1998, 39, 969-996.
(3) NBER based Recession Indicators for the USA (Currently at 0, no recession)
Note: Yes! U.S. recessions, documented by the NBER, are much less frequent, now.
Back in time, the passage of the Federal Reserve Act in 1913, the Federal Reserve Act of 1934, and the Glass-Steagall Banking Act of 1933 made a difference.
The number of recessions in the United States has decreased since the 1960s, due to a better understanding of their causes, and the adoption of policies to prevent them:
Policymakers' understanding
Policymakers have gained a better understanding of the causes of recessions, and have adopted policies to prevent them from deepening into depressions.
Macroeconomic theory
Macroeconomic theory has evolved to include the importance of public expectations and time-consistent policy choices.
Central bank policies
Central banks, including the Federal Reserve, have adopted numerical inflation targets to increase the transparency of monetary policy decisions.
This time series is an interpretation of US Business Cycle Expansions and Contractions data provided by The National Bureau of Economic Research (NBER) at http://www.nber.org/cycles/cyclesmain.html.
The NBER identifies months and quarters of turning points without designating a date within the period that turning points occurred.
The dummy variable adopts an arbitrary convention that the turning point occurred at a specific date within the period. The arbitrary convention does not reflect any judgment on this issue by the NBER's Business Cycle Dating Committee.
Our time series is composed of dummy variables that represent periods of expansion and recession. A value of 1 is a recessionary period, while a value of 0 is an expansionary period.
For this time series, the recession begins on the 15th day of the month of the peak and ends on the 15th day of the month of the trough. This time series is a disaggregation of the monthly series.
The recession shading data that we provide initially comes from the source as a list of dates that are either an economic peak or trough. We interpret dates into recession shading data using one of three arbitrary methods. All of our recession shading data is available using all three interpretations. The period between a peak and trough is always shaded as a recession. The peak and trough are collectively extrema.
Depending on the application, the extrema, both individually and collectively, may be included in the recession period in whole or in part. In situations where a portion of a period is included in the recession, the whole period is deemed to be included in the recession period.
The first interpretation, known as the midpoint method, is to show a recession from the midpoint of the peak through the midpoint of the trough for monthly and quarterly data.
For daily data, the recession begins on the 15th of the month of the peak and ends on the 15th of the month of the trough. Daily data is a disaggregation of monthly data. For monthly and quarterly data, the entire peak and trough periods are included in the recession shading.
This method shows the maximum number of periods as a recession for monthly and quarterly data. The Federal Reserve Bank of St. Louis uses this method in its own publications.
The second interpretation, known as the trough method, is to show a recession from the period following the peak through the trough (i.e. the peak is not included in the recession shading, but the trough is).
For daily data, the recession begins on the first day of the first month following the peak and ends on the last day of the month of the trough. Daily data is a disaggregation of monthly data. The trough method is used when displaying data on FRED graphs. The midpoint method is used for this series.
The third interpretation, known as the peak method, is to show a recession from the period of the peak to the trough (i.e. the peak is included in the recession shading, but the trough is not).
For daily data, the recession begins on the first day of the month of the peak and ends on the last day of the month preceding the trough. Daily data is a disaggregation of monthly data. A version of this time series represented using the peak method can be found at:
https://fred.stlouisfed.org/series/USRECDP
The OECD also offers a similar recession indicator series for the USA.
(4) GDP-Based Recession Indicator Index (Currently a low 2.4% probability)
This index measures the probability that the U.S. economy was in a recession during the indicated quarter.
It is based on a mathematical description of the way that recessions differ from expansions.
The index corresponds to the probability (measured in percent) that the underlying true economic regime is one of recession based on the available data.
Whereas the NBER business cycle dates are based on a subjective assessment of a variety of indicators that may not be released until several years after the event, this index is entirely mechanical, is based solely on currently available GDP data and is reported every quarter.
Due to the possibility of data revisions and the challenges in accurately identifying the business cycle phase, the index is calculated for the quarter just preceding the most recently available GDP numbers.
Once the index is calculated for that quarter, it is never subsequently revised.