How economists (and TikTok) know if a recession is coming

0:00Support for NPR and the following message come from Edward Jones. A rich life isn't always a straight line. Unexpected turns can bring new possibilities. With a hundred years of experience navigating ups and downs, Edward Jones can help guide you. Let's find your rich together. Edward Jones, member SIPC. This is Planet Money from NPR. It has been an unusual last few months for economics watchers on social media. Yeah, if you've been the TikTok-ing and the Snapchat-ing and the Instagram-ing, blue-skying. That's what they say. They say all those as verbs. Perhaps you have noticed a trend, friends.

0:44Suddenly, something that we here at Planet Money are thinking about all the time is kind of having a viral moment. Recession indicators. Oh, yeah. 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. Child is getting so bad out here. That is a recession indicator, says TikTok user TheSimplySimone. Little burger, little fry, and I believe a small drink, which honestly is basically a kid's meal. Baby, you know it's bad when Five Guys is actually rolling out combo meals.

1:22Now, Five Guys did tell us little does not mean kid's size, but whatever. You get the idea. Example number two comes from TikTok user Bryce Gruber. Recession. I can tell you if there's going to be a recession. If you go to the bar and there are like little dishes of wasabi peas out, recession, you're f***ed. Presumably because those, I guess, are relatively cheap as bar snacks go is the indicator. Yeah. And example three. No, you don't understand. Alex Earl's bun at Coachella is a recession indicator. Oh, correct. TikTok user Elisha Berman. I did not understand and Googled every part of this. So social media influencer Alex Earl, typically very put together hair situation, went to California music festival Coachella wearing very messy hair situation called a babysitter bun.

2:11There are only three times where it's appropriate to wear this bun. One is you just threw up in the bathroom at the club. Two is you're a literal babysitter, hence the name, the babysitter bun. And three is when you can't afford to get your roots done. So you tie your hair up in a messy bun to hide the fact that you have a bad haircut and three inch roots. Look, if lots of people do suddenly want to talk or even joke about recession indicators, we are here for that. The last few months have been this economic roller coaster. Tariffs were up, then tariffs were down. The stock markets were down, then they were back up.

2:44There were trade wars, then the trade wars were off, and then they're back on. And people are just unsure what to make of all this. And if they want to work through that anxiety by hunting for recession indicators, we at Planet Money are here to help. Hello and welcome to Planet Money. I'm Keith Romer. And I'm Kenny Malone. Today on the show, the recession indicators. And not just the TikTok joke recession indicators, but the wonky indicators economists look at when they are trying to figure out, are we in a recession? Will we be in a recession soon? Yes, you know, the stuff you need to know to fully unspool the macroeconomic implications of the babysitter bun.

3:24We are all hanging on by a thread financially, and this bun is the scissor that's going to cut us all loose. Support comes from our 2025 lead sponsor of Planet Money, Amazon Business. How can you free your team from time-consuming office tasks? Amazon Business empowers leaders to not only streamline purchasing, but better support their teams. Smart business buying tools enable buyers to find and purchase items fast so they can focus on strategy and growth. It's time to free up your teams and focus on your future. Learn more about the technology, insights, and support available at AmazonBusiness.com.

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4:45Just a few clicks can tailor your tone and writing so you come across exactly as you intend. Get time back to focus on your high-impact work. Download Grammarly for free at grammarly.com slash podcast. That's grammarly.com slash podcast. There is no perfect recession indicator. There's no data points that economists or TikTokers, for that matter, have found to perfectly, 100 % of the time, predict when we are going into a recession or even when we are in a recession. 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.

5:22economy contracts for two straight quarters. But the reality is an official group of economists get to make the recession call. Right. This is the Business Cycle Dating Committee at the National Bureau of Economic Research. Rolls off the tongue. I always think that it's a business cycle committee that is, like, dating each other. but that's not what it is. I think quite the opposite. What they do, right? They look at boatloads of data and then well after the fact determine, ah, yes, we were in fact in a recession starting however long ago. They are the official recession influencers, if you will.

5:56Thoughtful, thorough. They are months behind the news to some degree, but sort of the exact opposite of, you know, real social media influencers. And today we are going to take those two worlds and we are going to smash them together, the memes and the economics. The meme-conics, the meme-conics. The meme-nomics, yep. Our mission is to go find out what recession indicators economists take seriously and see what those say. But also, are you familiar with the hip-hop artist Flava Flav? I've heard the name, right? This is economist Claudia Somme. Famously wore clocks around his neck. Oh, okay. Some astute viewer has noticed in a recent video his clock seems to have shrunk.

6:43Recession indicator. Thoughts? Sounds like a good one. There is a well-documented list of what you might call alternative recession indicators. For example, the men's underwear index. Uh-huh. 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.

7:29That idea of like if it's a bad time and you're trading down and you're like watching what you spend your money on, there's that correlation. There's a story to that, right? 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. Which brings us to why we called Claudia Somm in the first place. Claudia has an entire recession indicator named after her. It's called the Somm Rule. 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.

8:10And it was all about how do we fight the next recession? How do we do it better? Because when there's a recession, it can take a long time for lawmakers to actually get together and help people. So this group was thinking through sort of automatic triggers, like if the economic data does some particular thing, then this federal aid program would temporarily kick into gear. The theme of the book overall was how could we put a lot of the relief we do in recessions, like stimulus checks, unemployment benefits, food stamps, how could we put that on autopilot? 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, OK, if this particular whatever thing happens in the data, then we are almost certainly in a recession.

9:02And that should be a sign to get people the help that they need. So I developed this indicator based on changes in the unemployment rate. The indicator works like this. When unemployment goes up by a certain amount, when a certain percentage of people become unemployed, then you can be almost certain that the U.S. is in a recession, even if the recession has not officially been declared yet. Now, the technical rule specifications are when the average of the three-month rolling unemployment rate goes up by at least 0.5 % compared to the 12-month low. But also, look, it is completely okay to just remember when unemployment goes up by a certain amount.

9:43That's fine. So, Claudia's working group, they published their book, and there is a chapter with her unemployment rule. Yeah, I mean, in the chapter, it didn't have a name. It did need a name, maybe. I showed up at the launch event for the book and the organizer started calling it the SOM rule and I was like panicking in the audience. Why were you panicking? I don't know. It doesn't – well, it just – I was just expressing a pattern in the data. Like I didn't make the unemployment rate have these fluctuations. I don't know. It's not my fault the unemployment rate goes down in a recession. Yes. She may not have wanted it, but all the same, the SOM rule was born.

10:22And 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. And then reason number two, employers, they're generally trying to do everything they can before they get to letting people off. So if you are seeing some rule levels of unemployment in the economy, there's a really good chance it is because businesses don't have another choice and the economy is in a legitimately rough spot.

10:56OK, so then what does the some rule say about whether there is a recession right now? So currently the summer says we are not in a recession. That's right. It is OK to upsize your necklace clock. Men, it is OK 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 SOM rule. What is the best part and worst part of having a recession indicator named after you? My phone blows up at the worst of times. I feel like I'm going to develop a recession indicator that's tracking my press calls. But it's a real privilege to be able to try and explain the data, what's going on in the economy, what are the risks we're facing.

11:44So some rule says not in a recession, but we should note the rule is only about whether we are in a recession today. It does not attempt to forecast recessions. 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. I love talking about this. I talk about it with my students endlessly to their sadness, I'm sure. 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.

12:25Yes, I think you're right, actually. Now, Menzi has been in the recession forecasting game for decades. He was a part of both the Clinton and the George W. Bush administrations. I'd been working in the White House at a time when we had been thinking about the possibility of the onset of a recession. So, you know, that was a natural interest to say, well, what is a good predictor of recessions? And the predictor of recessions Menzi wound up studying? The yield curve or more specifically the term spread. Oh, the yield curve. Long time planet money heart throb obsession. He's still our hearts. Because the yield curve has mostly proven to be this very good recession predictor.

13:09So 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. debt. Right. So maybe grandma buys you a treasury bond that's going to mature in 10 years. Right now, today, the U.S. government will pay you about 4.5 % interest to lock up your money for those 10 years. 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. And this is generally the relationship between time and interest rates on U.S.

13:48government debt. Less time means less risk, which also means you get paid less interest. 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. It doesn't cause a recession, but it signals a recession. And so it's reflecting the fact that people are expecting a slowdown. Is it that the wisdom of the crowds is smart and picks up on this? Is that basically what's happening here? Yeah, I guess you'd say on average, the market's better than an individual forecaster.

14:30Now, Menzi was not the first person ever to discover that the yield curve was a good indicator. But he has done a ton of research into how well it works as a predictor of recessions in the U.S. and in other countries around the world. And in the U.S., it has worked very well. 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.

15:10And to be fair, it has never missed a recession. So, okay, is the yield curve inverted right now? That's the big question. And the answer is it's partially inverted. That's the weird answer. Yeah. If you look at the graph, interest rates over the next three years, those are inverted. They go down when they would normally go up. After that, though, they start going up again. And what that means is, well, this is where we get into probabilities. Very fun. Menzi 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.

15:50And right now, Menzies' model says the probability of a recession in the next year is about 22%. Yes. Okay, so that feels high. Is that high? Well, it's still below like a 50 % threshold I would use. For a comparison, Menzies says during low risk times, there's about a 10 % to 15 % chance of a recession. So 22 percent is higher than that, but it's still not a number that makes him think a recession is coming. 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, you know, picking up on vibes of trouble ahead.

16:39But that is not the only way to try to get a holistic view of what is happening. Some economists try to figure out whether a recession is coming by going out and collecting a lot of different measurements from around the economy. 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. This bun signals to the world I don't have a f*** left to give. Yeah, but that is after the break. I'm going to walk barefoot through a gas station, and I don't care what you have to say about it.

17:14We are all hanging on by a thread financially, and this one is... This message comes from NPR sponsor Charles Schwab. When is the right time to sell a stock? How do you protect against inflation? Financial decisions can be tricky, and often your own cognitive and emotional biases can lead you astray. Financial Decoder, an original podcast from Charles Schwab, can help. Join host Mark Reepy as he offers practical solutions to help overcome the cognitive and emotional biases that may affect your investing decisions. Download the latest episode and subscribe at schwab.com slash financial decoder.

17:52This message comes from BetterHelp. As a dad, BetterHelp president Fernando Madera relates to needing flexibility when it comes to scheduling therapy. I have kids under 18, so time is very limited. That's why at BetterHelp, our therapists try to have sessions sometimes at night, depending on the therapist or during the weekend. So I think that's what we need to tell the parents. You're not alone. We can help you out. If a flexible schedule would help you, visit BetterHelp.com slash NPR for 10 % off your first month of online therapy. Now, I'm not someone who cares deeply about the comings and goings of Miss Alex Earle, but I do consider myself somewhat of an armchair anthropologist, and this bun is a cultural reset.

18:36And we're back. And genuinely, I really could listen to Alicia Bourbon's breakdown of the return of the babysitter bun all day. Only time will tell if the babysitter bun is truly a recession indicator, but I know a portentous omen when I see one. And guys, we are here. And if messy bun's 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.

19:17I don't really follow Lady Gaga, but why that would be an indicator? I'm just wondering. Well, we're going to let TikTok user Genius Girl Alert explain this one. When we are good, we're totally fine with like boring albums that are like quiet, whisper pop, doo-doo-doo-doo, you know. But when we are in times of strife, we want like dance. We want rap. We want Beyonce. We want Lady Gaga. We want recession pop. Yeah, we wanted it during the 08-09 Great Recession. Lady Gaga had two number one songs back then. Data point? Just saying. I would have to check it, though. Yeah, possibly. I guess Eustina did not check on that.

20:01No, this is not one of the data points Eustina tracks for a living. She helps oversee something called the Leading Economic Index, or the LEI. 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. No recession pop in there, but it does include, in no particular order, new building permits for houses, orders by manufacturers for goods and materials, a piece of the University of Michigan's famous Consumer Sentiment Survey. The whole S &P 500 is included in there.

20:39Crammed 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. And like those other indicators, LEI is at a very high success rate at calling recessions. And the way this has shown up in the past, Justina says, is the graph of LEI will hit a peak and then start going down. And then a few months later, the economy will start declining as well. OK. And so let me just ask you, what does LEI tell us about the possibility of a recession in the near future?

21:20So we usually look at the leading economic indicator from different perspectives. So you're not just going to give me an easy answer is what you're saying? That's correct. So the LEI, like any index, kind of bobs up and down. It's like a heart rate monitor for the economy. And so it's not just any time the index goes down some. Ustina is looking for something more like a plunge. Usually when we're looking at the ability to predict the recession, we'll look at so-called the 3D rule. The 3D rule, meaning looking at this graph with sort of three different lenses, usefully all starting with the letter D.

22:04So we'll look at the duration, at the depth, and the diffusion of the index. Duration and depth, those are simple enough. how far is the index dropping, and for how long. 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 gives us a fuller picture that the weakness is widespread components. It's like the different systems in the body. You're seeing, are they all shutting down? Is it localized, et cetera? That's a very good comparison, correct. And when we talked to Justyna, the three Ds, the LEI, had come down a little in March.

22:50A little. The three Ds were not freaking people out about a recession. They did not signal anything as of March. Great. That was a good... Done. Yeah, that was a good... Answered. That was a good reading. But when we talked to her, she was only working from that March data, which is to say data that did not include all of the economic chaos that went down in April with Trump announcing massive tariffs and the market tanking. And then Trump putting a pause on some of the tariffs and then markets like untanking. Yeah, April was a big month for confusing data. So Ustina and all of us really were waiting to see the LEI numbers that incorporated all of that.

23:36That was going to be a big deal. Yeah, it might be pretty important, correct? Are we talking moving markets level? Like, do you have to go into lockdown before it releases? You know what? Yeah. The LEI is market moving, so it's highly confidential. So there is, we do calculate it. Do you want to tell us, do you want to share it with our audience, Planet Money? We could all, bad idea. Okay. No, we cannot do it. No, we have to wait like everyone else. But we do not have to wait any longer. The new numbers just came out from LEI, and it says... Oh, that's the sound of me rubbing my hands together in anticipation.

24:19Well, the LEI did go down a decent amount, but not enough to signal a recession. Okay, that's great. So, at the moment, these indicators, LEI, yield curve, SOM rule, they are saying we are not in and probably not headed for a recession. But maybe this is a situation that the indicators are not calibrated for. Because the hardest type of recession to predict is one that comes completely out of the blue, from a sudden shock, like what happened during the COVID pandemic. 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.

25:06So to some degree, the question really boils down to, are we or are we not doing gigantic broad tariffs with all of the countries? Which means maybe social media could be the right place to go hunting for recession indicators after all. Not TikTok, not Instagram, the right place to look might be Truth Social and the account of one real Donald Trump. The president's posts about big new tariffs or big new trade deals. Yeah, fair, but I am not not going to keep following TikTok recession indicators from Elisha Berman. After years and years and years of a slick back bun, Alex Earle finally said, you know what, I've had it.

25:51Personally, I'm here for it. But I'm here to tell you that unfortunately, yes, it is a recession indicator.

25:59today's episode of planet money was produced by james sneed it was edited by marianne mccune fact check by sarah mcclure and engineered by cena lafredo alex goldmark is our executive producer i'm kenny malone and i'm keith roemer this is npr thanks for listening

26:18but for real men buy new underwear just swap them out swap them out we you know and i know Skimp on something else. There are other places to pinch pennies. Just please. That's not the one. Underwear is very important. It's really important. This message comes from Insperity. Excellence takes drive, work, perseverance. Tiger Woods brings it to the course. Insperity brings it to your business. Want to be the best? Work with the best. Insperity. How you HR matters. Learn more at insperity.com slash tiger.