2 days ago
San Francisco Fed offers up new way to monitor for US recessions
Federal Reserve Bank of San Francisco researchers offered a new warning gauge for recessions, adding to a suite of tools economists monitor to assess whether the U.S. is headed for a downturn.
The Labor Market Stress Indicator highlights geographical variations in the labor market by counting the number of states that see their unemployment rate increase at least 0.5 percentage point above its previous 12-month low.
"The national economy has invariably been in recession each time 30 or more states simultaneously experienced accelerating unemployment," Rohit Garimella, Òscar Jordà and Sanjay R. Singh wrote in a report released Monday. "The LMSI's transparent methodology - simply counting states with accelerating unemployment - makes it easy to interpret while providing valuable insights into the geographic distribution of economic stress."
The LMSI, which the authors describe as a state-level Sahm rule, allows policymakers to respond to signs of turmoil in the labor market or other regional downturns in an expedited manner. The National Bureau of Economic Research's Business Cycle Dating Committee, the arbiter of U.S. business cycles, has previously taken anywhere from four to 21 months to declare a recession.
Economists at the regional Fed bank found that in 2024 both the Sahm rule and an inverted yield curve foreshadowed that the economy was teetering toward a recession. Instead, business investment, payrolls and consumer spending continued to grow, leaving economists conflicted on the direction of the economy.
While the LMSI in July of last year briefly signaled a recession warning, the number of states with accelerating unemployment quickly fell below the 30-state threshold and suggested a recovery of the labor market.
"The flexibility, clarity, and ease of interpreting the LMSI make it a useful addition to the standard tools used by economists, policymakers, and the public to monitor economic conditions," the researchers wrote.
A slowdown in hiring paired with job cuts at technology companies and other firms have led to fears about the stability of the labor market. As of June 2025 data, the researchers said only the District of Columbia is showing accelerating unemployment.
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