Claudia Song

This is Planet Money from NPR.

We want recession pop. Yeah, we wanted it during the 08-09 Great Recession. Lady Gaga had two number one songs back then. Datapoint, just saying. I would have to check it, though. Yeah, possibly. I guess Justyna did not check on that.

This is a pretty famous economic indicator that is put out by a 100-year-old nonprofit called the Conference Board. And LEI is an index made up of 10 different data sets from all over the economy.

Crammed in there, yes. And it is also... looking at the yield curve and claims for unemployment insurance. So, you know, some of the same general ingredients that are in the two indicators we've already talked about here.

Okay. And so let me just ask you, what does LEI tell us about the possibility of a recession in the near future?

The 3D rule, meaning looking at this graph with sort of three different lenses, usefully all starting with the letter D. So we'll look at the duration, at the depth, and the diffusion of the index.

Diffusion is looking at how many of the 10 LEI components are involved with the drop. You know, is this drop contained to, say, housing and labor or are the problems diffused across the economy?

It's like the different systems in the body. You're seeing, are they all shutting down? Is it localized, et cetera?

And when we talked to Justyna, the 3Ds, the LEI, had come down a little in March, a little. The 3Ds were not freaking people out about a recession.

Are we talking moving markets level? Do you have to go into lockdown before it releases?

Look, if lots of people do suddenly want to talk or even joke about recession indicators, we are here for that.

Do you want to share it with our audience, Planet Money? We could all...

Bad idea.

Yeah, if you've been the TikToking and the Snapchatting and the Instagramming, blue-skying. That's what they say. They say all those as verbs. Perhaps you have noticed a trend, friends.

And these days, the shock that economists have been worried might happen to the economy is a full-on global trade war, which many economists say would increase the odds of a recession considerably. So to some degree, the question really boils down to, are we or are we not doing gigantic broad tariffs with all of the countries?

Yeah, fair, but I am not not going to keep following TikTok recession indicators from Elisha Berman.

But for real, men, buy new underwear.

Yes, you know, the stuff you need to know to fully unspool the macroeconomic implications of the babysitter bug.

And also, for that matter, there's no official definition of recession. Generally speaking, you'll hear that a recession is when the U.S. economy contracts for two straight quarters. But the reality is an official group of economists get to make the recession call.

I always think that it's a business cycle committee that is like dating each other, but that's not what it is.

Thoughtful, thorough, the... They are months behind the news to some degree, sort of the exact opposite of, you know, real social media influencers.

But also, are you familiar with the hip-hop artist Flava Flav?

This is economist Claudia Song. Famously wore clocks around his neck.

Some astute viewer has noticed in a recent video his clock seems to have shrunk. Recession indicator. Thoughts?

The idea here being that men will start pinching pennies by maybe not buying new skivvies leading up to a recession. So underwear sales, a leading indicator of recessions. Also, there is something called the Lipstick Index.

The idea here is that lipstick sales will actually go up as economic times get worse because people will trade in expensive luxury items like fancy handbags or dresses for cheaper luxury items like a tube of lipstick.

Allow us a quick tour through TikTok to demonstrate. Example one, when the restaurant Five Guys, you know, burgers and fries, announced it was testing out a combo meal, a value meal, really, for the first time ever.

So Claudia doesn't discount the lipstick index specifically, but these alternative measures are perhaps not the most robust recession detecting instruments at our disposal.

This dates back to 2019. Claudia was working at the Fed back then and was asked to join a group tasked with writing a book of policy recommendations.

And so Claudia's job was simply to look for patterns in the data that could, in real time, say basically like, oh, oh wait, okay, if this particular whatever thing happens in the data, then we are almost certainly in a recession and that should be a sign to get people the help that they need.

Now, the technical rule specifications are when the average of the three month rolling unemployment rate goes up by at least point five percent compared to the 12 month low. But also, look, it is completely OK to just remember when unemployment goes up by a certain amount. That's fine.

Why were you panicking?

And the SOM rule works for a couple of reasons. Number one, it identifies trends and not just the jittery ups and downs of month-to-month job numbers because it's using an average. So if the SOM rule triggers, you can be sure that unemployment is really going up. It's not a fluke.

OK, so then what does the SOM rule say about whether there is a recession right now?

That's right. It is okay to upsize your necklace clock. Men, it is okay to buy new underwear. Men, you can buy new underwear. Please do buy new underwear. Because in this moment, we are not in a recession according to the Psalm rule. What is the best part and worst part of having a recession indicator named after you?

No, no. For that, we turn to Professor Menzi Chin. He teaches economics at the University of Wisconsin-Madison and has spent years studying our collective ability to predict recessions.

Now, Five Guys did tell us little does not mean kid's size, but like, whatever, you get the idea.

Well, let me ask you this. Have you noticed that maybe your students are perhaps a bit more interested in talking about recession indicators? Absolutely. I would say possible recession indicator.

And the predictor of recessions Menzies wound up studying?

So the yield curve is simply a graph. Showing all of the different interest rates that you would get for all of the different kinds, different durations of U.S.

But I could also buy a much shorter treasury, a three-month treasury, for example. I get less interest on that right now. My money is locked up for less time. There's less risk. This makes sense.

However, there are strange moments when the shape of that relationship, when the literal shape of the yield curve graph flips completely upside down. And in that situation, investors are worried about the near term and about the economy deteriorating.

Is it that the wisdom of the crowds is smart and picks up on this? Is that basically what's happening here?

Like, over the last 50 years, whenever the yield curve inverted, a recession has followed within 18 months every single time. Except... Yeah, well, there's the recent exception a few years post-COVID where it did invert, but there was no recession. But other than that, other than the last one, it has worked every single time. And to be fair, it has never missed a recession.

And what that means is, well, this is where we get into probabilities. Very fun. Menzies has a model that compares basically all of those interest rates, the pairs of term spreads, and then it's able to spit out the odds that we will have a recession in the next year.

Yes. Okay. So that feels high. Is that high?

You know, the yield curve works as a predictor because the bond market is simply trillions of dollars of bets on the future of the U.S. economy. And historically, the throng of humans placing that flood of bets has been good at picking up on vibes of trouble ahead.

Yes, and after the break, we have one final recession indicator that attempts to smash, like, all of the other indicators together. Well, I guess I should say maybe not all of the other indicators.

Oh, correct. TikTok user Elisha Berman. I did not understand and Googled every part of this. So social media influencer Alex Earle, typically very put together hair situation, went to California music festival Coachella wearing very messy hair situation called babysitter buns.

Yeah, but that is after the break.

And we're back. And genuinely, I really could listen to Alicia Berman's breakdown of the return of the babysitter bun all day.

And if messy buns not portentous omen enough, allow us yet one final triangulating recession data point, as discussed online, which I then felt compelled to discuss with our third and final economist, Justyna Zabinska-Lamonica. Now, Justyna, let me ask you this. Lady Gaga is yet again at the top of the Billboard charts. And so someone would flag that and say, this is a recession indicator.