The Economy Is Looking Pre-Recessionary

As an American of a certain age, I know quite a few people who’ve been warned by their doctors that they’re prediabetic. That is, their blood sugar is sufficiently elevated to put them at risk of Type 2 diabetes, even though they aren’t yet showing any symptoms. The good news is that they can greatly reduce that risk by losing weight, improving their diet and getting more exercise. But they need to take action quickly to avoid serious health problems.

No, this isn’t a medical advice column. But I found myself thinking about medical analogies when looking at recent economic data. The United States probably (probably) hasn’t entered a recession yet. But the economy is definitely looking pre-recessionary. And policymakers — which right now basically means the Federal Reserve — need to move quickly to head off the risks of serious economic deterioration.

It’s already clear that the Fed made a mistake by not cutting rates last week; indeed, it probably should have begun cutting months ago. Unfortunately, we can’t turn back the clock. But the Fed’s open market committee, which sets short-term interest rates, can and should make a substantial cut — probably half a percentage point, rather than its usual quarter-point — at its next meeting, scheduled for mid-September.

And we can only hope that the recent plunge in long-term interest rates, which reflects expectations of future Fed cuts, will be enough to avert a gratuitous economic slump.

Why do I say that the economy looks pre-recessionary? The most important factor is the unemployment rate, which has been gradually trending up over the past few months. Friday’s employment report triggered the Sahm rule, which says that a sufficiently large rise in the unemployment rate is a strong indication that a recession has started. Many economists, including Claudia Sahm, who devised the rule, believe that for a variety of technical reasons things may not be as dire as they look. But even so, the situation is worrisome.

It’s not just the official data. Private surveys and general buzz also point to a softening economy. The appraisal of the labor market by consumers surveyed by the Conference Board has deteriorated, Amazon has warned that consumers seem cautious, and so on. None of this screams recession, but it does point to a rising risk of a near-future recession.