U.S. financial markets have been in turmoil for weeks, as investors debate whether President Trump's trade war and falling consumer confidence could trigger a full-blown recession. But a UC Santa Cruz economist says that a model he helped develop, which is attracting growing attention, shows that the economy is already in a recession and has been for nearly a year.
"Our method starts to flash in April 2024," said Pascal Michaillat, an associate professor of economics. "That's when the method crosses its threshold and says a recession might have started."
While Michaillat said it is still too early to know how deep the recession is, it would be yet another cautionary sign in a precarious economy if the conclusion is accurate. And Michaillat believes it is.
He and Emmanuel Saez, director of the Stone Center on Wealth and Inequality at UC Berkeley, used a combination of the national unemployment rate and the job vacancy rate to plot previous recessions.
"The way the labor market works is that first, firms reduce the number of job vacancies they post. As a result, it's harder to find a job, and as a result, the unemployment rate goes up."
The team found that the pattern repeated itself in every downturn dating back to the Great Depression, without a single false alarm.
"We get no false positive, no false negative," he said.
Most recently, Michaillat said job openings began declining sharply in 2022, while unemployment began rising in 2023. The trends moved into critical territory last spring.
"It's telling you, yes, a recession has started," he said.
Wall Street Journal editor Spencer Jakab wrote in August that the Michaillat-Saez indicator "could become required reading" for those trying to gauge the health of the economy. That's because traditional indicators of a recession are imperfect.
By definition, the classical definition of a recession—two consecutive quarters of declining gross domestic product—does not identify a recession until six months after it began. Other methods can be riddled with errors.
The National Bureau of Economic Research, a private organization generally accepted as the official arbiter of recessions, typically does not declare that one has occurred until well after it has ended. By contrast, Michaillat said his indicator can call a recession roughly 1.5 months after it began.
He said the method is not as good at predicting the depth of a recession or how long it will last. So far, he said, the recession appears to be mild.
"The indicator has crossed our threshold. But so far, we are not that much above the threshold," he said.
That may be because the economy entered it from a position of relative strength, and is just now cooling down.
"Roughly speaking, we're back at normal," he said. "However, typically when you see cooling, the cooling kind of continues once it started."
That is why Michaillat said his indicator is cautionary, as policymakers, business owners and everyone else tries to stay ahead of the curve.
If the recession worsens, he said, cyclical industries will be the first to feel the effects. Those include sectors important to the Central Coast such as tourism.
"Going on holidays, going to hotels, this is something that people tend to cut pretty early because it's less necessary than getting food and paying for school and health care and this type of stuff," he said "So, if the economy ends up entering a recession and getting in worse shape, I think typically tourism is hit quite hard."
Another critical area is construction.
"Of course, people are not going to buy a house, or build a new house, if they don't know whether they keep their jobs or if their finances are strained," he said.
Michaillat said that individuals may want to keep an eye on his indicator as they consider their own finances.
"Maybe save a little bit more, maybe postpone big purchases," he said. "Maybe now is not a great time to quit your job, if you're thinking about that. Maybe you want to stay with a job that you have, all these types of decisions, just keeping in mind that things are not going to be as good as they've been in the past few years."
