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An early-warning system for recessions would be worth trillions of dollars. Governments could dole out stimulus at just the right time; investors could turn a nice profit. Unfortunately, the process for calling a recession is too slow to be useful. America’s arbiter, the National Bureau of Economic Research, can take months to decide. Other countries simply look at gdp data, which emerge with a lag.
So recession-watchers have developed rules of thumb. Many now indicate trouble for America. Best-known is the Sahm Rule (see chart 1), which was triggered earlier this month. It looks for a short, sharp rise in unemployment, sounding the alarm when the three-month average of the unemployment rate moves by at least half a percentage point above its 12-month low. A new paper by Pascal Michaillat of the University of California, Santa Cruz, and Emmanuel Saez of the University of California, Berkeley, modifies the rule by adding a second indicator: changes...