Economy in Focus: A Local View on the Soft Landing

In the final weeks of 2023, the economic outlook was cautiously optimistic. The Federal Reserve’s rate tightening appeared to be taming inflation without spiking unemployment and launching a recession. A soft landing looked like a real possibility.

Real, but not assured. One economic indicator suggested the country was on the brink of a recession.

The onset of an economic downturn poses challenges for any business, affecting everything from hiring levels to inventory replenishment. One well-known economist has suggested that a targeted geographic approach can indicate whether a slowdown is on the way.

The Sahm Rule for Sensing Recessions

The indicator in question is the Sahm Rule, named for former Federal Reserve economist Claudia Sahm, who published the theory in 2019. It states that when the unemployment rate rises 0.5 percent above its 12-month low, the nation is a few months into a recession.

The Sahm Rule has held true for every recession since 1970. In recent notes, Sahm has cautioned that current conditions are potentially unique enough to evade her rule, but business executives remain wary.

As Sahm noted in a recent article, “Looking local for early signs of trouble,” the Sahm Rule applies to more than the national economy. It works just as well as an indicator of whether individual states are experiencing recessions.

In other words, the Sahm rule can be localized. Location intelligence can enhance the insight it provides, allowing businesses to fine-tune strategic planning on a regional level.

A big box retailer committed to a just-in-time strategy, for example, might decide to limit inventory in a state or region experiencing recession. If the marketing team had planned a series of pop-up stores for 2024, managers might shuffle the rollout plan to reflect economic conditions in particular areas.

Using geographic information system (GIS) technology, analysts and executives can examine local unemployment data on a map. The GIS advantage is underscored when other datasets are added to the map—sales trends, demographic profiles, even foot traffic statistics. Those layers of information reveal the economic personality of a location and guide a company’s decisions.

Reading the Tea Leaves State by State

Applying GIS-based location intelligence to Sahm Rule data can have far-reaching implications. A manufacturer of circuit boards or lithium-ion batteries might notice a recession beginning in California, and decide to trim its raw material purchases from overseas suppliers. If the company applies Sahm Rule data on a smaller scale—counties or census tracts, for instance—executives might see recession signals in certain areas and slow hiring. Conversely, decision-makers might see room for accelerated hiring in areas that are on stronger economic footing.

The business implications of an economic barometer like the Sahm Rule are nearly limitless.

The data could help a logistics company decide how to adjust operations and investments at regional distribution facilities. It could also help companies better understand where their potential workforce is willing to relocate, and what salaries workers there will expect.

Sahm herself predicted that a soft landing was in the cards for 2024, even if the economy experiences some bumps along the way. As business executives tend to the all-important task of planning operations and investments, location intelligence and the Sahm Rule can serve as helpful barometers for any upcoming turbulence.