The Rising Influence of Rising Affluence

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Summers fact checked over recession claim. From the interview...

The discouraging fact is that, when you have unemployment below 4% and inflation above 4%, recession always follows within two years.

Fact check...
https://www.politifact.com/factchecks/2022/jun/23/lawrence-summers/fact-checking-larry-summers-formula-unemploymen/

Fact-checking Larry Summers’ formula for unemployment, inflation, and recessions

• The data Summers based this on did find the likelihood of a recession at 100% under these conditions. However, these conditions almost never occur. They’ve been seen in just a handful of quarters out of the 256 quarters since 1955.

• During the nearly half-century from 1970 to 2018 — the part of the data set which is most similar to today’s economy — there were no examples of Summers’ stated conditions occurring. That casts doubt on how reliable this formula is.

• Summers’ broader notion that low unemployment and high inflation presages a recession is well-supported by economic theory. But it’s lacking in the type of empirical support that his talking point implies.

See the sources for this fact-check
Amid the public outcry over inflation hitting 40-year highs, Harvard economist Larry Summers — one of the earliest and most vocal figures to warn that inflation was more worrisome than many policymakers believed — has become something of an oracle on the topic, appearing frequently in print, on television, and even sharing a phone call with President Joe Biden.

Summers, a veteran of the Clinton and Obama administrations but considered something of a centrist, has taken to articulating a clear message. Summers says the current high inflation rate needs to be taken seriously, but he adds that trying to combat it necessarily risks another problem: tipping the economy into a recession.

On June 17, Summers told Barron’s that "when you have unemployment below 4% and inflation above 4%, recession always follows within two years." (Summers used the same formula in an interview with NBC’s "Meet the Press" two days later.)

Currently, the unemployment rate is 3.6% and the inflation rate is 8.6%, so if Summers’ rule is correct, then the U.S. should be facing a recession some time in the next 24 months.

Economists told us that the theory behind Summer’s broader point is solid: To tackle inflation, the Federal Reserve needs to hike interest rates, and doing so will inevitably hamper business expansion, which increases the likelihood of layoffs and slower economic growth.

Still, even if Summers’ logic is sound based on economic theory, we found that Summers’ formula, at least as stated in media appearances, is at best oversimplified and under-nuanced.

Summers’ premise — that there are a decent number of time periods when unemployment was below 4% at the same time inflation was above 4% — has problems from the start. In reality, there haven’t been many such periods.

Let’s start by looking just at the periods when unemployment was below 4%. Since 1948, unemployment has been this low only on four general occasions.

• January 1951 to November 1953, or 35 months.

• February 1957 to April 1957, or three months.

• February 1966 to December 1969, or 47 months.

• April 2000, and September 2000 to December 2000, or five months.

So, before mid-2018, there were a grand total of five months since 1970 in which unemployment was under 4%. That's less than 1% of the months over the past half century or so.

Unemployment has also been below 4% between mid-2018 and the onset of the pandemic in early 2020, and also from December 2021 to the present. But the pandemic recession was an oddity caused by an external factor, and it is this recent period of employment that Summers is using to predict the next recession, so it can’t also be used as historic precedent.

Meanwhile, this is before we factor in high inflation. We cross-checked the months of sub-4% unemployment with inflation rates and found that none of the five months in 2000 also had inflation above 4%.