The noted economist on the impact of supply shocks, the origins of the Sahm rule, why she thinks the Fed will remain in a holding pattern on rates, and more.
Our guest on the podcast today is Claudia Sahm. Claudia is chief economist at New Century Advisors, the founder of Sahm Consulting, and a regular contributor at Bloomberg Opinion. She has policy and research expertise in macroeconomics, consumer spending, and household finance. She created the Sahm rule, an automatic trigger for stimulus payments in recessions. Previously, she was a section chief at the Federal Reserve, where she oversaw the Survey of Household Economics and Decisionmaking. Before that, she worked for 10 years on the staff’s macroeconomic forecast. She was a senior economist at the Council of Economic Advisers. She holds a Ph.D. in economics from the University of Michigan and a bachelor’s degree in economics, political science, and German from Denison University.
00:00:00 Lessons From the Fed During the Global Financial Crisis
00:04:56 Making Sense of Fed-Speak
00:09:29 The “Whiplash Economy” and Understanding Risk
00:14:21 Rising Gas Prices, Geopolitical Uncertainty, and Consumer Sentiment
00:18:03 Interest Rates, AI, and Fed Leadership Changes
00:29:48 Undoing the Effects of Trump’s Tariffs
00:33:34 The Sahm Rule and Recession Risk Today
00:43:56 Costs of Underfunding US Economic Data
00:49:57 “Economics Is a Disgrace”
Risk, Not Volatility, Is the Real Enemy for Investors
Michael Gates: Why More Advisors Are Migrating to Model Portfolios
Q2 Market Outlook: Why a Stock Barbell Strategy Is Ideal for Today’s Market
If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com.
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(Please stay tuned for important disclosure information at the conclusion of this episode.)
Amy Arnott: Hi, and welcome to The Long View. I’m Amy Arnott, portfolio strategist for Morningstar.
Ben Johnson: And I’m Ben Johnson, head of client solutions for Morningstar.
Arnott: Our guest on the podcast today is Claudia Sahm. Claudia is chief economist at New Century Advisors, the founder of Sahm Consulting, and a regular contributor at Bloomberg Opinion. She has policy and research expertise in macroeconomics, consumer spending, and household finance. She created the Sahm rule, an automatic trigger for stimulus payments in recessions. Previously, she was a section chief at the Federal Reserve, where she oversaw the Survey of Household Economics and Decisionmaking. Before that, she worked for 10 years on the staff’s macroeconomic forecast. She was a senior economist at the Council of Economic Advisers. She holds a Ph.D. in economics from the University of Michigan and a bachelor’s degree in economics, political science, and German from Denison University.
Claudia, welcome to The Long View.
Claudia Sahm: Oh, I’m so excited to be here today. Thank you.
Arnott: We wanted to start out by talking a little bit about your background. You went to the University of Michigan for your Ph.D., and I’m curious, how did you end up working at the Federal Reserve right after you finished your Ph.D. in 2007?
Sahm: Michigan has a very strong program in macroeconomics, but in particular, in applied macroeconomics, really research studying the Fed and kind of what’s happening in the economy. At Michigan, I also benefited from having a lot of training in how to run surveys. So this idea of economists, we love to use data, but I was also trained in how to go create data, how to try and get some of the economic concepts that are hard to find in the existing data. So that set of skills really set me up well to be a successful economist at the Federal Reserve. When Fed Chair Jay Powell says they’re data-driven, I mean, they truly are. The amount of data that’s brought in, analyzed, tried to make a judgment on, and also the Fed, it creates data as well. And so it was a really good transition from the training I had at Michigan.
And then of course, I got a lot of on-the-job training when I showed up at the Fed in the summer of 2007 as one of the economists who focused on consumers. My first year at the Fed during the global financial crisis and then the years after in the Great Recession, that was really a birth by fire in terms of becoming a real world economist.
Arnott: Yeah, I can imagine.
Johnson: Claudia, that timing was, I guess, maybe ex-post fortuitous. What were some of the sort of key lessons learned in that trial-by-fire moment, sort of entering your role right as the global financial crisis, probably the most meaningful moment in markets in the economy in most people’s lifetime?
Sahm: Well, in terms of the analytical lessons, I certainly benefited coming in with a bit of a clean slate, being a new economist and something that I worked a lot on consumers and particularly the years into the recovery from the Great Recession, consumers were really hit hard and they just weren’t coming back. And that perspective of realizing that some of the tried and true relationships, the way the economy snaps back after a recession, that sometimes those don’t work. And then that’s where you really have to go and look at the data and kind of think about what could be happening that’s unusual and different. And getting that as a lesson very early on—don’t just go with the historical patterns. You got to dig into the data and understand that things can really shift in the economy, particularly if you get hit with a big enough shock.
And the financial crisis was definitely one of those. So there was a good learning in terms of the analytical tools to be really open-minded and kind of look at where the economy is going. And then there’s just the kind of like becoming a young professional, realizing that, in a crisis, it’s really tough. A crisis does not bring out the best in people. You’re really stressed out. You’re trying to deal with a lot of uncertainty. And I know my division director at the time, he looked out at the staff, especially during the financial crisis, and he’s like, “You just got to put your head down and do your best work.” And even in a crisis, there are no benefits from panicking. You just got to keep pushing through. And unfortunately, those lessons have proved useful, a few more times at least, in my career since then.
Arnott: In addition to your day job, you’ve also been active with other writing. You started your macromom blog back in 2017, and then the Stay-at-Home Macro Substack in 2021. You also are a regular contributor for Bloomberg Opinion. What do you like about writing for those outlets, and what’s your main goal in your writing?
Sahm: When I left the Federal Reserve in 2019, I left to work on fiscal policy at a think tank. And I had an opportunity to do that during the pandemic. Again, I changed jobs right before the bottom falls out. I left in 2019 and I got to work on the pandemic in 2020 and advising Congress and other members. But over time, and I’ve continued to work on macroeconomics. I’m now with an investment firm in the DC area, New Century Advisors. So the kind of analytical work I’m doing, looking at the data, what’s happening in the economy, trying to make sense of it, that’s really my bread and butter. But another piece that’s been so important to me is trying to communicate what’s happening in the data to a broader audience. And one thing in particular since I left the Fed, I’ve spent a lot of time trying to explain the Fed—what it does, how it works, what its mission is, why the institution is important.
I mean, that’s just been a real … It’s been something I’ve been very dedicated to. It’s kind of like trying to pull the curtain back on the Fed and really help the general public even, not just investors, but also just the general public understand this institution because it’s really important and understanding is the first step toward accountability. So the communicating of the economics, the research, the institutions, that’s just something that I find important, and I enjoy doing. I enjoyed having those conversations with the noneconomists also about what’s happening in the world.
Johnson: I think as you just described, trying to communicate these complex concepts to lay investors, I mean, oftentimes, and even myself included, you hear a lot of sort of Fed-speak and the inner machinations of global financial markets. And it’s like, I feel like I’ve picked up the operator’s manual to a Klingon spaceship, and I can’t make heads or tails of any of it.
Sahm: Yeah. And that’s exactly … My ability to read the Fed-speak, the Klingon, the way, the precise wording, I really hope someday that that’s not a marketable skill because it really should be generally understood what the Fed’s doing, what their views are. Now I think some of the way that they speak, there’s a precision to the language. And as a Fed economist, you’re trained in how to write about the data in a very consistent way. The Fed really, they strive to kind of be consistent in the way that they talk about the economy, they talk about monetary policy. It can make it a little impenetrable to regular people, but there is kind of a logic to it. But I think one thing that I learned at the Fed, and I really believe is at the core of the institution is the discussions start with the data and really trying to understand what are the data out there. And I mean, we have a deluge of different statistics and numbers we can go to. So it’s also about knowing the quality.
Another important thing that I learned as a forecaster at the Fed, it’s not just about getting the number right. Is GDP going to be 2.5% or 2.3%? Is inflation going to be 1.8 or 1.9? I mean, it’s nice as a forecaster to get the numbers right, but really it’s about getting the story right. Being right for the wrong reason is still wrong. And in terms of, for the policymakers, they need to understand what’s happening in the world, where it might be headed, and you really do need to tell a story. And an internally consistent, logical story, one that ties back to theory are definitely helpful, but that’s kind of learning that it’s like taking the data, telling a story, and then checking your story as you go along. I think that’s a way that I learned how to support the mission of the Fed as an economist, as a staff person there. And I think it very much is kind of a good starting point for understanding what’s the Fed going to do next, or how are they thinking about the world?
Arnott: We also wanted to spend some time talking about the current macro environment, and there’s no shortage of stuff going on at the moment. We’re currently taping this in mid-April, and I think you described the recent environment as the “whiplash economy.” How should investors think about things that are happening like the war in Iran and supply shocks like the Strait of Hormuz? There’s so many unknowns and unknown follow-on effects. Is there a reasonable way to think through potential outcomes and what the potential impact might be on the economy?
Sahm: Right. So first, stepping back just from the most recent events in the Middle East, it’s been the case now for five or six years, really since the pandemic, the US economy has had a whole series of these supply shocks, cost shocks. So in the pandemic, we had disruption to supply chains and there were certainly some labor force disruptions people were afraid of becoming ill or did become ill, so that you had some real disruptions in the labor force from the pandemic. We’ve had, last year, large increases in tariffs, we’ve had the war in Ukraine and now the conflict in the Middle East to push up energy prices. There’s just been a whole series and then big swings in immigration, which is also kind of fundamental to the economy. And so what economists refer to as “supply shocks,” we can think about them as kind of fundamental to the economy, like the inputs, the costs that businesses face, the costs that the consumers face.
And it’s kind of unusual to have had such a string of these. Often the shocks that say the Fed is trying to think about is we have some big burst of demand, maybe we have a big tax cut or we have big refunds going out to households, or we have a recession that’s a real collapse in demand. So that’s kind of the typical thing that moves around the economy, but we’ve had this whole series of supply shocks. And one thing that is particularly problematic about them is, when they’re the bad kind of supply shocks, they can both push up prices, push up inflation, and push down on growth. And they can often do both at the same time. In the 1970s, this was referred to as “stagflation.” We’re not in a space like that, but we’re definitely where there’s this tension. I will say that sometimes we can have good supply shocks, and they’re in the mix right now, too.
There’s certainly been a push with some deregulation, which we can argue about whether that’s a net good or not, but I mean, that kind of moves in the direction of it can push up growth and push down inflation. But another big one that is just at the kind of start is the AI kind of rollout into the economy that has the potential in pushing up productivity, push up growth and push down inflation. So like we’re dealing with these supply shocks, which are not typical. They’re not ones that the Fed is really well suited for. Moving around interest rates doesn’t affect the labor force. It doesn’t affect productivity. And it’s not clear whether we’re just in a string of bad luck or there have been policy decisions, but it’s a tough setup. It’s certainly a tough setup for the Fed, but I will say just it’s a tough setup for investors or just businesses, regular people trying to navigate these shocks, which are not only kind of these fundamental rewiring of the economy.
When I talk about it as a whiplash economy, we’ve also had them in rapid succession and many of these have been really big shifts. And so it’s just, it’s hard to know how to respond to them, frankly. And even once you have a response, there’s a lot of costs in adapting to the changes. And so I think what you’ve seen with the Fed, which I think is a pretty broad approach to this environment, is you kind of fall into a risk management mode. It’s not just about what you think is the most likely thing to happen in the economy, what’s the most likely thing to happen as we move through tariffs, we move through the conflict in the Middle East, or we move through the AI revolution—it’s about managing around and staying away from the worst-case scenarios, like kind of being ready to pivot as soon as you have enough information.
And so then you have to do a lot more scenario analysis. You have to be kind of testing, having a sense of what to look for in the worst-case scenarios and responding to that. So it’s a little different than just having your, what’s your base case and respond to that. You really got to think about the whole distribution of risk and position yourself so you’re ready to move when it becomes clear which direction is the right direction to move.
Johnson: Claudia, so much great stuff to unpack here. The one thread I wanted to pull on, and I think most recently, and maybe prominently the impacts of these supply shocks that you’ve described that your average American consumer is experiencing is when they pull up to the gas pump and you’ve made sort of the distinction historically about the data that the Fed is looking at, key data points like CPI, and then the data that your average consumer is most concerned about, which is, I’m paying on average maybe more than $4 a gallon for gas. How do you think about reconciling those, and how do you think that the Fed has to navigate this distinction between what shows up in the data and what shows up in just sort of sentiment and most prominently maybe paying at the pump?
Sahm: Right. The biggest question right now for the Fed in terms of the effects of the conflict in the Middle East on inflation, it’s not so much about where gas price is right now, it’s about will they go higher? How long do they stay at this high level? And actually a big question for the Fed, the big worry that they have, particularly now that inflation has been above the Fed’s target for a full five years at this point, even before we had the conflict in the Middle East. And they’re worried that people, businesses just kind of take it as given that inflation’s now 3%, inflation’s just going to be higher. What’s really remarkable, I mean when you talk about the sentiment surveys, sentiment is absolutely abysmal right now. And I think it makes sense also in this context of that whiplash economy, of a whole set of supply shocks, the reason sentiment hit an all-time low this month is not just about what’s happened with gasoline prices going to $4 a gallon.
That certainly added to it. That was the latest leg down, but we have seen, really since 2022, Americans in these surveys pointing to prices as the reason that they are falling behind year after year. So this has just been a continual getting hit with these unexpected price shocks, and that’s what’s weighing on sentiment. What’s been really interesting, and as far as the Fed’s concerned, kind of encouraging, is that when you ask these same households and these surveys to look out five to 10 years, “What do you think inflation’s going to be?” Despite the fact that we have had multiple price shocks that they’ve dealt with, they’re still kind of hanging in there that inflation’s going to come back down because that’s the piece. It’s not just about where we are right now in terms of gas prices or in terms of inflation, it’s just, are we going to get stuck here?
And so far the indications both on the actual what’s happening in the Middle East, there are some signs that there’s, we’re in a temporary ceasefire, there is some path to getting back to something that would look like normal. And so far, consumers, they’re with that, and that’s really important for Fed policy going forward. But so I think some of this disconnect between when you look at different pieces of economic data, you look at the sentiment surveys, you look at financial markets, a lot of it’s like different horizons. What are you asking, like what’s embedded in those data? So I think they do still all kind of hang together. And in fact, in the sentiment surveys, there is something encouraging in that most people when they’re asked still see this as a temporary hardship in terms of higher inflation, not a permanent one.
Arnott: From the perspective of the Fed, do you think that there is likely a similar view that yes, inflation has been running well above the 2% target for a long time, but it’s not necessarily a crisis that needs to lead to another interest rate hike?
Sahm: My read, both in terms of how events are evolving in the Middle East, and again, looking at some of these inflation expectations, both the surveys of households, businesses, and market-based inflation compensation, it all points toward a Fed that is going to be patient through this. I still see, and Fed Chair Powell has said this recently, I mean, they’re still kind of positioned that the next move will probably be a cut as opposed to a hike. And I don’t think they’re lined up to start hiking, particularly given even just events in recent weeks, there’s a lot of uncertainty still.
But one thing that I suspect both the conflict in the Middle East, but also kind of the aftereffects of the tariffs last year, is you’ve really pushed the Fed into a place where they want to see progress on inflation before they cut again. Because there’s a lot of discussion about like, “Oh, the Fed will look through an energy shock or the Fed should look through the tariffs.” And what that means is just this is a price increase, it’s going to be temporary, and so the Fed shouldn’t react to it. They shouldn’t increase rates to try and fight it because they’re just going to do more damage because they’re going to destroy demand, they’re going to push down growth, and that inflation was going to come down anyway. So you didn’t need the Fed to be having the cost of the higher unemployment, the lower growth.
So they shouldn’t respond to it. But you could also argue, well, the tariffs, there are costs to businesses and consumers, the higher gas price, I mean, consumers and diesel is even higher than gasoline in terms of its increase. So that’s a cost to consumers and businesses. You could make the argument, well, thinking about those effects, maybe the Fed should actually be easing up. They should be trying to support it. But given the fact that inflation has been running above the Fed’s targets for five years and these shocks, whether it’s the tariffs or the Middle East, they are large and unprecedented and uncertain … this Fed, particularly under Powell’s leadership, just is not going to get ahead of the data. It may be very reasonable. And they’ve been saying for almost a year now that, well, the tariff inflation, it’ll be a one-time effect on prices and then inflation will come down.
And they keep saying that, but they want to see it before they cut. And we’re months away from seeing the tariffs really kind of peak and kind of start to move down inflation. And now we’ve got another cost shock coming in with the energy prices. I mean, so to me, what the end result of this could be a Fed that’s just very slow-moving because they want to see the data, and we keep getting more bad shocks, which pushes it out. So I see a Fed that’s probably more in a holding pattern as opposed to ready to be hiking, but in a holding pattern could come at a cost, too.
Johnson: Claudia, I wanted to circle back to one of the other items that you had mentioned before and kind of the push and pull. And one of the things that I think we actually could get in trouble for not spending at least more than a minute on AI in 2026, but the push and the pull there, I think really whether real or perceived has a lot to do with future prospects for overall levels of employment and productivity. I’m curious where you stand. Is that registering in the macro data that we’re seeing today? What are the prospects there? Are we all looking ahead to a future where we’re all living on UBI and just doomscrolling under a tree each and every day?
Sahm: Yeah. So I had just mentioned that the Fed under Powell’s leadership, they’re just really focused in on data. So of course, the Fed is getting ready to undergo a leadership change. It’s a little bumpy, a little uncertain exactly as how it’s going to roll out. But one of the things that Kevin Warsh, who is nominated by the president to be the next Fed chair, he’s really focused a lot on AI as a potential boost to productivity. So that’s good for growth, but also as a disinflationary, right? Because it’s a way to be more efficient for businesses, and they’re producing goods and services. And that should then eventually, at least eventually, put downward pressure on inflation, right? Now you did mention there’s this other piece of, it could push up structural unemployment if people aren’t as needed, and there are mass layoffs, and we don’t get people matched up with new jobs right away.
So there’s like on the Fed’s employment side mandate, there’s also some question marks, but Warsh is really focused on like, this is going to cut the legs out under inflation, and the Fed in his argument—and he’s not the only one that’s made this argument, but it’s an argument—well, if the Fed is, they should get ahead of this. If they’re going to get this help on inflation, the Fed shouldn’t be standing in the way, because again, that kind of being stuck on interest rates, that does hold back on capital investment, particularly now we’re also seeing in the AI space, some of the capital investments requiring borrowing. And I mean, interest rates become more relevant if you’re not just using cash for all of this. So there’s this argument that the Fed should be looking into the future, and they always are trying to forecast and look into the future, right?
But they should be looking into the future and responding now in terms of cutting interest rates. And you can tell that story, you can make that case. I mean, I am not as convinced as I think Warsh is when he makes the case, but we are in the current environment, I think it is going to be so hard for the Fed to move ahead of the data because you could have … Timing really matters. You could have a period where big investments in artificial intelligence, say the buildout of the data centers, other kinds of the software investments, they could actually boost demand and put upward pressure on inflation for a period of time. And what’s going to happen in the labor market is really a wild card in terms of how that transition happens, whether it’s smooth or very disruptive. So it’s just one of those things where the Fed, again, they’re thinking about scenarios, they’re going to be watching the data very closely, but given that this is a general purpose technology, I mean, this could be really transformative or not, right?
And it can be very hard to predict how it goes. I think this is one where they’re going to be watching the data, which almost certainly puts the Fed behind the curve, but what are your choices? The Fed doesn’t know which curve we’re headed down. I mean, no one does, right? So they’re going to play much more, I think, defensively and wait on the data as opposed to getting out ahead of this. And I suspect that’s going to create some tension as the Fed shifts its leadership, though Warsh is one individual, one vote. I think the Fed will still be very data-driven. And again, the context of having had all of these shocks the Fed has tried to navigate, I think has put them in a much more “show me before I do something” kind of attitude.
Johnson: Yeah. I’m curious where you net out on the prospect of AI and broad adoption usage as being disinflationary because, I mean, at least at the onset, there’s early indications that, if anything, it’s had some upward pressure on things like utility prices, electricity prices. Longer term, it could drive productivity, but does that come out of workers’ pockets at the end of the day, like the epicenter of any disinflation comes in the form of wages and what are the second and third, fourth order effects of that?
Sahm: Yeah, no, absolutely. Any discussion of AI, especially, you’ve got to think about the time horizon. Over a long time horizon, I’m pretty positive on the technology. Again, it has all the makings of what we call a “general purpose technology,” really being transformative, being a push to productivity. Productivity, the ability to do more with less or do more with the same … That’s the key to prosperity, right? Like being able to do more with our resources. It also is a way that can grow the pie in terms of having more growth, and then there is a potential for it to come with less inflation. And I think over the long haul, that is probably the right way to think about AI. And I’m also not a deep pessimist in terms of the labor market implications. I think over the long run, AI as a technology is going to create new jobs.
It is so much easier to think about jobs that will be destroyed by this technology than it is to think about the new jobs it will create. I just don’t buy it that this somehow is just different than all the other big technological changes that it’s going to leave humans to the side. I just, I don’t see that. But in terms of, if you’re thinking of what’s going to happen over the next year, the next three years, right, there, transitions can be very disruptive, and there absolutely are costs, even from, I would call AI a positive supply shock because it has the potential over the long run to grow the pie and lower inflation, but in the transition, as we’re making the investments that are necessary, that does put pressure on demand. I mean, the capital expenditures are really pretty notable. What’s happening in the energy costs are definitely substantial.
I mean, I think any of these times where you have these extra cost pressures, it does create incentives to adapt, to think about how to manage these costs. And we are very much in the early innings. And so that’s where I think it would be, particularly thinking in the context of a policymaker like the Fed, for them to go all in on the disinflationary effects and start changing rates this year, lowering rates this year because of it, it just seems we’re getting ahead of the benefits, even if that’s where we’re headed to in the long run.
Arnott: Despite how much President Trump might be making vocal statements in favor of rate cuts.
Sahm: Yeah. I suspect that the dynamic that we’ve seen between the White House and the Fed is going to keep going. Even when a new Fed Chair is in place, the Fed is not positioned to be putting ultralow interest rates in place, outside of there being a real collapse in the economy in terms of like a recession. And so it’s like, be careful what you wish for, but this is not a Fed even under new leadership, even as the board will probably evolve over time, and there’ll be more Trump nominees that will probably come be part of the Fed. It’s really hard to see a sharp pivot in terms of the actual interest rates, right? I mean, the messaging might change when the leadership changes at the Fed, but in terms of actually shifting policy, I don’t see that happening. And thus, I suspect the president will still be very frustrated with the Fed if interest rates don’t come down substantially.
Arnott: I also wanted to touch on the issue of tariffs, which you mentioned earlier, and assuming that our next president isn’t aligned with President Trump’s tariff policies, how long do you think it might take to undo the effects on global trade from the tariffs that have been put into effect under Trump?
Sahm: We’re still learning what the effects of these tariffs have been. We’re still watching in the inflation data, seeing what are almost certainly clear signs of the tariffs being passed through to consumers in terms of core goods inflation has been pretty elevated over the past year and really hasn’t turned the corner yet. And there’s lots of studies that have looked at, say, import prices to try and see the extent to which foreign producers were taking on the cost of the tariffs. And what it looks like from these data is really the cost of the tariffs are being borne by US businesses and consumers. They’re dealing with it in different ways. Not all of it’s going straight to consumers, but that cost is sitting in the United States. So one would think, OK, this has been very disruptive. I mean, we talked about the consumer sentiment surveys—the business sentiment surveys have been deeply negative about the tariffs because they’re very disruptive.
I mean, it’s an extra cost, and people had to manage their businesses. But then there’s this question of, as you asked, so say a Democratic administration comes in, do they undo the tariffs? Well, another difficulty that the US has been facing is really substantial deficits, a real shortfall in terms of the revenues coming into the government versus the expenses. And that tension is growing over time. I mean, it comes back to our big entitlement programs, our Social Security, our Medicare, and then, we have an aging population, right? So there is a real tension in the deficits, the federal debt, and tariffs are—they’re revenues. And so I think this is one where the political economy of to what extent are the tariffs rolled back? You could make an argument of maybe tailoring them more. In the second Trump administration, the tariffs have been much more widespread.
In the first administration, they’re very focused on China, which you could make arguments about trying to shift our trade away from China. In this case, we are tariffing countries all around the world. I mean, it’s really, really broad-based. And so maybe one could have a more targeted, a more strategic use of tariffs, but any rollback of the tariffs is going to make the deficit problem worse. I suspect the political economy of that may be very difficult in terms of rolling back, though I am no fan of the tariffs, but I will say by the time we get to that point, we have learned something about how the cost of the tariffs are flowing through the economy. The administration has been adamant that part of the tariffs was to bring manufacturing back to the US. We are way early in this. I mean, there’s no real sign of that at this point, but it could be as this administration goes along, we might see some of those benefits showing up.
And then I think that would necessarily fit into any discussion about should the tariffs be rolled back. So again, the politics of this are going to be way more complicated than the economics of where the tariffs go.
Johnson: Claudia, I wanted to bring it back to data and specifically a rule that you developed that you’re known for that’s named after you. I was actually just looking at the time series on FRED’s website earlier today, the Sahm rule. If you could tell us a little bit about what is the Sahm rule, what was your inspiration for that, and how you think it can be best used or, conversely, risks being misused in practice?
Sahm: In 2019, I participated in a policy volume at the Brookings Institution, and it was about preparing for the next recession. The theme of it was automatic stabilizers. These are policies that turn on and off based on economic conditions. So you don’t need Congress to come in and enact a law in the recession. They get started. And we have some of these in the United States. Our tax system, which is progressive. So tariffs are regressive, but in general, the US tax system is progressive. In a recession when people’s income drops, their taxes drop even more because we tend to … The tax rates go up as you are higher income. So that’s kind of a stabilizer, or like our unemployment insurance system. The whole system gets bigger in a recession just because there’s more unemployed people. So it’s another way that … the programs that kind of shift with the economy to support the economy.
The argument was, well, there’s more of these. There’s a whole set of policies that Congress routinely puts in place during a recession. And so it’s like, let’s figure it out. What’s the best way to do these? Have Congress decide on them ahead of time, and then figure out what are the economic triggers for the programs. And so we’re all ready to go. That’s a way to prepare for the next recession. And so my chapter was talking about my work at the Fed and also I had done a lot of research through the Great Recession and the recovery, that the stimulus checks were a very effective way to support households and support spending and that it’d be a good way to get money into the economy quickly in a recession and kind of talked about what would be ideal in terms of how long you would do them if it was a particularly severe recession.
And so really it was about having automatic stimulus checks. I’d put them on autopilot, use them in a recession, hit go. But for the volume, they wanted us to be very practical, like the kind of thing that a member of Congress could pull off the shelf and like really put into action. And so they’re like, “Well, we need a trigger. You want to send out checks automatically in a recession? When would you do that? ” And so I developed an indicator of a recession. So it’s not a forecast. It’s like we’re in a recession using changes in the unemployment rate. And historically it had been the case that, and I kind of knew this coming into it, relatively small changes in the unemployment rate are bad news. It’s not about the level of the unemployment rate. We’ve gone into recessions with the unemployment rate around 4% and the unemployment rate around 8%.
It’s not about the level—it’s about changes. And so specifically what the Sahm rule shows is take a three-month average of the unemployment rates, so you don’t get thrown off by a bump or wiggle in one month, you compare the current value of that series to its low over the prior 12 months. If it’s a half a percentage point increase or more, you’re in the early months of a recession—that historically had been the case. It is not perfect, but it has been very accurate over time. And it’s, again, the whole goal was to put this in legislation. So it’s simple by design. It’s very focused on why we fight recessions, unemployment. And also in part of the proposals and other places where this has been used, it’s kind of thinking about ways to shut off programs that are in recessions. I say extra unemployment benefits by looking at the unemployment rate has come down relative to before the recession.
So I think it’s important not just to turn things on automatically but also think about how to turn them off. So that was the idea behind the Sahm rule. Now I will say, in recent years, it’s really pushed me in terms of thinking about the rules of thumb for recessions. So in 2024, the Sahm rule did trigger. For months ahead of that, I had said, “This may trigger. This is not a recession. The economy was still growing. Things looked good in general.” But what had happened, and I mentioned this as one of our supply shocks earlier on, we had a really pretty dramatic surge in immigration, also had a lot of people joining the labor force. And what that was doing was pushing up the unemployment rate, but in a good way. If you have an inflow of workers, well, sometimes it takes them a little while to catch up with the businesses and get more jobs.
And so that rising unemployment rate is actually a good sign because once they get jobs, you’re going to have more growth, you’re not going to have a recession. And so what was happening is kind of getting up to that half a percent increase, the labor supply, because we had this big burst of immigration was pushing it up. And actually right now, we are having the opposite effect because immigration has really cratered and we’ve had decreases in labor force participation in general, which is actually pulling down on the unemployment rate. So it’s kind of … I always knew that labor supply was kind of the Achilles’ heel of the Sahm rule. Generally, it doesn’t move around as dramatically as we’ve seen in recent years, but I’m still very much in favor of the automatic stabilizers trying to design policies, turn on, turn off. I think the pandemic kind of underscored how the politics can get pretty tricky when that’s what’s driving economic policy.
But I’ve also been really, it’s been pretty sobering in recent years, these kind of rules of thumb have really been strained and not just the Sahm rule. The yield-curve inversion. I mean, there’s just a lot of rules of thumb we use for diagnosing or like recessions right around the corner that haven’t captured what’s going on. A lot of our indicators have looked pretty gloomy, and the economy keeps chugging along.
Arnott: So related to that, over the past months, we’ve seen some stretches of pretty weak job growth, as you mentioned, without an official recession. How should policymakers and investors interpret that kind of gray zone economy?
Sahm: It really is part of thinking about, like I said, this whiplash economy, thinking about the supply shocks, because what’s happening is these supply shocks have the ability to rewire the fundamentals of the economy. If the fundamentals of the economy get rewired, well, then this whole, the recession, boom, bust, those are the cycles. They’re kind of the movements around the fundamentals. And so what I think can be really tricky is if the fundamentals have shifted a lot, we got to take that into account. I think a good example that I certainly have felt in terms of looking at data, what felt like whiplash is, since January of 2025, in 40% of the months, so not quite half, but a sizable fraction of the months, we have seen declines in monthly payrolls. So the jobs day and the Friday and since the middle of last year, we’ve really settled into a pattern of payrolls decline the next month they increase, then they decline.
And early this year, these have been like big movements in terms of increases and declines and increases. And so you start to look at it, and a couple of things happen. One, typically, declines in monthly payrolls are a sign that something is very wrong in the economy. During a recession, about 80% of the months hit that kind of the decline. So I mean, that’s like in the recession, but even in like a year before recession, it’s more like 10% historically. It’s elevated, but nothing like … I mean, what we have seen in the last year is just really dramatic. And so normally, like the alarm bells would go off and you’re like, oh, the labor market’s falling off a cliff, like we’re going into a recession or there’s just some real weakness. But what looks like has actually happened is because we’ve had such a sharp decline in immigration and also we have an aging population—so we’ve got labor force participation in general—our labor supply is basically not growing. We’re not creating new workers, which means for the labor market to be doing OK and keep that employment rate relatively stable, we don’t need to create a lot of jobs. So kind of a good jobs number, which often gets referred to as a “breakeven” on the idea of how many jobs have to be created to keep that employment rate constant. The estimates of the breakeven right now are really close to zero. So that means that in any given month, we have weather, we have seasonal adjustment, Easter moves around, like something happens and then just the measurement isn’t totally precise. So if a good number’s pretty close to zero, well, we’re going to be in a world where just from month to month, we’re going to go positive, negative, we’re going to bounce around.
And it is not a sign that the data are broken. It is not a sign that things are just off kilter or that we’re falling off a cliff. It’s a sign that the fundamentals of the labor market are just slower growth. And it has a lot of implications, implications for GDP. This goes in a lot of directions, but it’s just one of those things where you have to really understand that some of the shocks that are hitting us are just, they’re rewiring the economy. They’re changing the fundamentals, which means any intuition about like, is a recession coming? We got to be really careful because the fundamentals are so different at this point.
Johnson: Claudia, I want to come back to, in part, your early career as a creator, aggregator, and now more recently avid consumer of data. And as I mentioned before, looking at your own indicator in the plot thereof on the FRED website, there’s a notable sort of gap in that data that coincided with the government shutdown late in 2025, and that’s brought to the surface a lot of questions and growing sort of skepticism about maybe undue influence of other corners of markets and government on official statistics. I’m curious whether or not we should rightly be worried about that or if there are other things that in the process we might be overlooking in your opinion that might be fundamentally more concerning. And one of the things you’ve flagged is just the level of investment and participation in some of these key surveys in particular that this data emanates from.
Sahm: Unfortunately, it is the case that we need to have a watchful eye at this point for any kind of political manipulation of the economic statistics. I want to be very clear, I have seen no signs of that. I mean, the sign that people watch for would be like mass resignations from the statistical agencies. These individuals take their job very seriously, and if they were asked to doctor numbers, they would be leaving. So there’s no sign that that’s happening right now. Unfortunately, the watchful eye piece is the president did fire the commissioner of the Bureau of Labor Statistics after a jobs release last year that wasn’t good. I mean, it had big downward revisions. And I mean, there’s a discussion about why the fire, but this was unprecedented, and it did really call kind of a suspicion that, well, if the numbers aren’t good, people are going to be punished for it.
Now, again, it seems the current commissioner, the acting commissioner, is a lifelong Bureau of Labor Statistics employee, the person who has been nominated has also come from the staff. So it doesn’t look like things have really spiraled off in terms of political manipulation. What I’m really worried about, and I think there are clear signs of, at this point, is neglect of the agencies. And in particular, not putting investments in to the agencies and actually going in the opposite direction. For many decades, this does not start with the Trump administration, but for many years, the budgets of the statistical agencies have not kept up with inflation, right? They haven’t, in some cases, have even fallen in nominal terms. And we talked about there’s an explosion of data. There’s all kinds of methods. For our statistical agencies to stay cutting edge, they need to be able to purchase data.
They need to be able to have the best staff, and they need to be able to go out and run the large surveys that they use for a lot of the data collection, and you need to keep innovating, right? We have an over $30 trillion economy, over a hundred million workers, tens of millions of businesses. I mean, this is a real challenge to measure. It’s a great challenge to have, to have such a dynamic economy and new developments like AI. And so you want a statistical agency that is really up to the task, and that requires investments. You get what you pay for. And that’s just not been happening for several years. And in this administration, particularly as part of the DOGE efforts across the federal government, and you have really substantial staff cutbacks at the statistical agencies. And often it’s … I mean, because many of these were voluntary resignations, because there were big buyout programs, and it hit hardest among some of the older leadership positions at the agency.
So you’re strapped in terms of the staff resources, and we’ve seen in terms of budget cuts, the Consumer Price Index, so the survey they use for the CPI, they’ve had to drop certain geographic areas to try to cut costs. And there’s been discussions about with the household survey, having a smaller survey, and we’ve seen response rates decline, and the data … In terms of for the users of the data, what’s happening is not manipulation in terms of pushing down inflation or pushing down unemployment, we’re just getting data that are noisier. And especially for anybody who wants to look at the latest monthly reading and get a sense of where the economy’s headed, it’s getting harder to pull the signal out of the noise because when you make the survey smaller, you cut back, you cut corners, it’s just going to make things less precise. And the US has really … I mean, we’ve been very spoiled in the sense that we have the statistical agencies that are the envy of the world.
We can look at our monthly data and read something out of it, and that could be slipping away. And again, it’s slipping away because we’re not putting the investments in. And I feel very strongly also that private sector data can be a great complement to the government statistics. They can’t be a substitute. They just don’t have the comprehensiveness. They don’t have the transparency. So there’s no private sector shortcut here, but you got to make investments. You got to have a strategy for improving the statistics.
Johnson: I can’t help but be struck by what feels like a tragic irony that the individuals responsible for measuring CPI have a budget that cannot keep pace with CPI.
Arnott: Claudia, you’ve been very vocal about the cultural problems in economics, most notably in a 2020 blog post titled “Economics Is a Disgrace,” which got a huge amount of attention, both positive and negative. What do you think it is about economics that makes it uniquely bad as opposed to other fields in academia that might also have toxic or unhealthy cultures?
Sahm: So having been an economist, I mean, I really can best assess my own part of the profession. I don’t want to necessarily say that economics is worse than anything else, but the one thing I’d say with “Economics Is a Disgrace” post is what I was trying to point to was just what I had seen and experienced as a culture that was hypercompetitive, which, I mean, competition is great. I’m an economist, I have this great free efficiency, but to a point that there were a lot of exclusions. I mean, I certainly talked about race and gender. There’s representation issues. There are fewer women. There are very few Black, Hispanic, people of color in economics, but also it always has a very high fraction of Ph.D. economists have parents who have Ph.D.s. It’s very few first-generation colleges. So there’s aspects of class, there’s aspects of what institution you’re from.
Again, economics is not the only profession that suffers from some of this, but I definitely felt as someone who’d worked at the Fed, very dedicated to economic policy, that representation to a point really does matter in terms of policy, getting the voices in the room. And also one thing that certainly motivated the post was just having interacted with a lot of the graduate students, the people who were early in their careers, that we just weren’t … the economics was, again, that hypercompetitive or just really we’re all going to be square pegs in a round hole, that it was just a real detriment to our next generation and kind of how we create new ideas, how we create better policies. So it was more about the culture as opposed to trying to … I did give examples, which I got a lot of attention, but I mean, it could have pulled lots of different examples of things, but it was more just trying to create, have an environment that is more supportive of different viewpoints, different perspectives.
And it’s really funny, the post got, probably the thing that I’ve written that’s been most read, but when I wrote it, I kind of didn’t think anybody would care, because it’s nothing that was in the post was news to people who are in economics, right? So I had spent a lot of time having had conversations about how I thought this was not a good setup, and people were like, “Oh, this is just the way it is.” So I actually was a little surprised that anybody cared because up until that point, I hadn’t gotten the sense that anybody cared.
Johnson: Claudia, I want to finish on the topic of new ideas, different viewpoints, different perspectives. I’m curious if, for the benefit of our listeners, you have any sources, be it must-read books, people that you follow, podcasts that you listen to, that you might recommend to our listeners that are interested in expanding their horizons, exposing themselves to new ideas?
Sahm: Yeah. Again, I don’t have any one particular podcast to point to or book to point to, but I personally have benefited from, on a pretty regular basis, sitting down with all of the different media and writing and voices that I listen to, and really pushing myself to bring in a voice that I know I disagree with or has a different point of view. I mean, I think anytime, this is true for investors, true for a comment. If you’re trying to think about what’s happening in the world, and we’ve talked about the scenario analysis, you need to think about this could happen or that could happen. And I mean, frankly, it is really hard for any one individual to do all of that in their own head because we do have a viewpoint of like, this is what I think is most likely.
And as much as I can argue with myself, I still think that’s most likely. So a great way to do the scenario analysis, which can be kind of fun, is to find people who feel very strongly about something totally different being the most likely. So then you don’t have to argue with yourself. You can go listen to another perspective. And it’s very personal, like being able to find that individual who you’re able to listen to, right? Because I mean, you want to get out of your comfort zone, but we have to be realistic about how much we can absorb. So I think it’s just the exercise of sitting down on a pretty regular basis and pushing yourself to add somebody in to your mix. And it is so easy now between the various podcasts or, I mean, Substack is just an explosion of various voices.
And there’s plenty of other platforms. So I guess, I won’t point to any one source because I think it’s very personal. Each of us need to bring something else in. It depends what you already have in your space, but I think it’s a really worthy exercise, and it’s one that you do have to, you have to put some time into it, to go find a voice or find a perspective that isn’t necessarily there. And again, it’s good to fill in your blind spots.
Johnson: I think that’s a terrific recommendation—escaping our echo chamber, which I think sometimes I know for myself personally, it requires every bit the amount of forces it took to put Artemis II around the moon and back.
Sahm: It can be done.
Johnson: We need the energy. It can be done.
Arnott: Well, thank you so much, Claudia. This has been a great discussion.
Sahm: Thanks so much. I appreciate it. It was a lot of fun.
Johnson: Really appreciate your time.
Arnott: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media at Amy Arnott on LinkedIn.
Johnson: And at Ben Johnson, CFA on LinkedIn, or @MstarBenJohnson on X.
Arnott: George Castady is our engineer for the podcast. Jessica Bebel produces the show notes each week, and Jennifer Gierat copy edits our transcripts. Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at thelongview@morningstar.com. Until next time, thanks for joining us.
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