Economic graph showing unemployment and job vacancies converging towards a stormy horizon.

Is a Recession Looming? Unveiling a New Economic Indicator

Jordan Keane in Business & Economy December 2025 • 3 min read.

"Economists are constantly seeking reliable tools to predict economic downturns. A new indicator combines job vacancy and unemployment data to provide an early warning system for recessions."

Predicting economic recessions is a complex but crucial task. Economists and policymakers constantly seek reliable indicators that can provide early warnings of potential downturns. Traditional methods often lag or prove inaccurate, leading to calls for innovative approaches. Pascal Michaillat and Emmanuel Saez developed an indicator that combines job vacancy and unemployment data, offering a new lens through which to view the economy's health.

The conventional Sahm rule, which relies solely on unemployment data, has been a popular tool for identifying recessions. However, it has limitations. The new indicator seeks to improve upon the Sahm rule by incorporating vacancy data, reflecting the idea that a decline in job openings coupled with rising unemployment can provide a more robust signal of an impending recession.

This new indicator offers several potential benefits, including earlier detection of recessions and a more accurate historical track record. By understanding how this indicator works and its implications, individuals can gain valuable insights into the current economic climate and better prepare for potential challenges.

How Does This Recession Indicator Work?

Economic graph showing unemployment and job vacancies converging towards a stormy horizon.

The indicator functions by calculating the minimum of two components: a modified Sahm indicator based on unemployment and a similar indicator constructed using the vacancy rate. The unemployment component measures the difference between the three-month trailing average of the unemployment rate and its minimum over the past 12 months. The vacancy component mirrors this approach, measuring the difference between the three-month trailing average of the vacancy rate and its maximum over the past 12 months.

The indicator then proposes a two-sided recession rule:

When the indicator reaches 0.3 percentage points (pp), a recession may have started.
When the indicator reaches 0.8pp, a recession has started for sure.

This two-tiered approach provides a more nuanced view of the economic situation, acknowledging the uncertainty inherent in predicting recessions. A reading between 0.3pp and 0.8pp suggests caution, while a reading above 0.8pp signals a high likelihood of a recession.

Looking Ahead: Implications for the Economy

The new recession indicator developed by Michaillat and Saez offers a promising tool for understanding and predicting economic downturns. By combining unemployment and vacancy data, it addresses the limitations of traditional indicators and provides a more nuanced view of the economy's health. Whether the US economy is currently in a recession remains to be seen, but this new indicator provides valuable insights for policymakers and individuals alike.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2408.05856,

Title: Has The Recession Started?

Subject: econ.gn q-fin.ec

Authors: Pascal Michaillat, Emmanuel Saez

Published: 11-08-2024

Everything You Need To Know

What is the main focus of the new economic indicator discussed?

The new economic indicator focuses on predicting economic downturns, specifically recessions. It aims to provide an early warning system by analyzing both job vacancy and unemployment data. This approach seeks to improve upon traditional methods, like the Sahm rule, offering a potentially more accurate and timely assessment of the economy's health.

How does the new recession indicator, developed by Michaillat and Saez, differ from the traditional Sahm rule?

The new indicator, developed by Pascal Michaillat and Emmanuel Saez, distinguishes itself from the traditional Sahm rule by incorporating job vacancy data alongside unemployment data. The Sahm rule relies solely on unemployment figures, which can sometimes lag in providing accurate recession signals. By including vacancy data, which reflects the number of unfilled job openings, the new indicator aims to offer a more comprehensive and potentially earlier signal of an impending recession, reflecting a more nuanced view of the economic situation.

What are the key components and the methodology behind the new recession indicator's calculation?

The new recession indicator operates by calculating the minimum of two components. The first component is a modified Sahm indicator based on unemployment data, measuring the difference between the three-month trailing average of the unemployment rate and its minimum over the past 12 months. The second component mirrors this approach but uses the vacancy rate instead, calculating the difference between the three-month trailing average of the vacancy rate and its maximum over the past 12 months. These components are then used in a two-tiered approach to determine the likelihood of a recession.

What do the different thresholds of the new economic indicator, specifically 0.3pp and 0.8pp, suggest about the economic situation?

The indicator uses a two-tiered approach. When the indicator reaches 0.3 percentage points (pp), it suggests that a recession *may* have started, indicating a need for caution. However, when the indicator reaches 0.8pp, it strongly suggests that a recession *has* started. This tiered structure acknowledges the uncertainty inherent in predicting recessions and allows for a more nuanced interpretation of the economic climate, providing a more granular view for policymakers and individuals.

What are the potential benefits of using this new recession indicator for the economy and its stakeholders?

The new recession indicator offers several potential benefits. It aims for earlier detection of recessions and a more accurate historical track record than traditional methods. This early warning system can provide valuable insights for policymakers, allowing them to respond more effectively to economic downturns. It also benefits individuals by giving them a better understanding of the economic climate, enabling them to prepare for potential challenges such as job losses or reduced investment returns. By combining vacancy and unemployment data, the indicator provides a more comprehensive and potentially more reliable assessment of the economy's health.