The warning bell for a recession in the U.S. economy has sounded! Top economists criticize the Federal Reserve (FED) for turning a blind eye.

Swissblock wealth management company's chief macroeconomist Henrik Zeberg warned that the U.S. economy is heading in an unfavorable direction and believes that the Federal Reserve (FED) has failed to identify clear signals. He pointed out that the unemployment rate in the U.S. reached 4.6% in November, the highest level in four years, approaching the “Sam Rule” threshold, raising the likelihood of an economic recession to around 40%.

Unemployment rate 4.6% triggers recession warning under the Sam rule

To support his pessimistic outlook, Zeberg pointed to the unemployment rate in the United States, believing it to be a “never-fail” indicator that appears before every major recession. He warned that a rising unemployment rate indicates that the U.S. economy is nearing a recession. In November, the U.S. unemployment rate reached 4.6%, the highest level in four years, approaching the threshold of the “Sam's Rule,” raising the likelihood of an economic recession to around 40%.

The Sahm Rule is a recession warning indicator proposed by economist Claudia Sahm. The rule states that when the three-month moving average of the unemployment rate is 0.5 percentage points or more above the lowest point of the past 12 months, the U.S. economy has typically entered a recession. This rule has never produced a false positive since 1970, and each time it has been triggered, it has accurately predicted a recession.

The unemployment rate in the United States fell to 3.4% in April 2023, the lowest level in 50 years. Based on this benchmark, the current unemployment rate of 4.6% has risen by 1.2 percentage points, far exceeding the 0.5 percentage point threshold of the Sam rule. This suggests that according to the standards of the Sam rule, the U.S. economy may have already entered a recession, or is at least on the brink of one. However, the Federal Reserve (FED) has not acknowledged this risk, and instead lowered interest rates again in December, indicating that it believes the economy is still on a soft landing trajectory.

The three major recession signals pointed out by Zeberg for the U.S. economy

Unemployment Rate Soars to 4.6%: A four-year high that triggers the Sam Rule; historically, every rapid increase in the unemployment rate has signaled a recession.

Weak Labor Market: Although the new employment data is distorted due to the government shutdown, the rising unemployment rate indicates a contraction in real demand.

Consumer Confidence Collapse: The University of Michigan Consumer Confidence Index is 52.9, a staggering drop of 28.5% compared to the same period last year, indicating a deterioration in the economic outlook.

Zeberg insists that the weakness in labor, housing, and consumer indicators suggests a severe contraction in the future U.S. economy, and that the Federal Reserve's short-term liquidity is unlikely to offset deeper structural pressures. This judgment stands in stark contrast to the official position of the Federal Reserve. Fed Chair Powell stated in a press conference after the December meeting that the economic performance is strong, the labor market is robust, inflation is declining, and no signs of recession are being observed.

Why the Federal Reserve (FED) has a Blind Spot It Ignores

Zeberg said, “Ladies and gentlemen - we are heading straight into a serious recession - and the Federal Reserve (FED) is completely blind to it despite having such vast resources.” This harsh criticism points to the institutional blind spots of the Federal Reserve (FED). He noted that the Federal Reserve (FED) employs hundreds of trained economists but still missed the “obvious and revealing” economic patterns.

According to Zeberg, the analytical methods are overly complicated, which not only fails to clarify the underlying realities of the business cycle but also obscures them. Zeberg emphasizes that understanding the correct sequence of internal events within the business cycle is key to predicting recessions. He points out that if one cannot clearly grasp how the various stages of the U.S. economy unfold and interact, even years of research and vast institutional resources may lead to incorrect conclusions. He believes that it is this kind of misreading that leaves policymakers unprepared for potential future scenarios.

This economist's assessment suggests that the Federal Reserve's current outlook underestimates the severity and timing of the impending economic recession. Despite the unprecedented access to data, research capabilities, and analytical models, Zeberg believes that the Federal Reserve is still operating effectively without a clear understanding of the next phase of the economic cycle.

The blind spots of the Federal Reserve (FED) may stem from three aspects. The first is model dependence. The Federal Reserve (FED) uses complex econometric models to forecast economic trends, but these models are based on historical data and assumptions, making it difficult to capture structural changes. When the economy faces unprecedented shocks (such as COVID-19, the AI revolution, geopolitical upheaval), the predictive power of historical models significantly diminishes.

The second is data lag. Most economic data (GDP, unemployment rate, inflation rate) that the Federal Reserve (FED) relies on are lagging indicators, reflecting events that have already occurred. By the time this data shows problems, the economy may already be in deep trouble. Leading indicators (such as manufacturing orders, consumer confidence, credit spreads) are more timely, but the Federal Reserve (FED) does not place enough emphasis on them.

The third is institutional inertia. The Federal Reserve (FED), as a large bureaucratic organization, has a decision-making process that involves multiple committees, countless meetings, and complex political balancing. This system makes it difficult for it to quickly adjust policy direction. Even if some officials recognize the risks, they need to persuade the entire FOMC to change policy, and this process can take months.

The Deadly Contradiction of Strong GDP and Soaring Unemployment Rate

The biggest contradiction currently presented by the U.S. economy is the coexistence of strong GDP and soaring unemployment rates. The annualized GDP growth rate for the third quarter remains at 3.2%, which is considered strong by historical standards. However, the unemployment rate surged to 4.6% in November, reaching a four-year high. How can this contradiction be explained?

One interpretation is K-shaped economic divergence. GDP growth is mainly driven by technology investments and consumption of the affluent class, while for ordinary families living on wages, the economy has entered a recession. Data from American banks show that the top third of households account for more than half of the spending, while a quarter of households live on wages. This divergence makes it difficult for GDP, as a total indicator, to reflect the true health of the economy.

Another interpretation is data distortion. The government shutdown for 43 days led to interruptions in the collection of employment and inflation data, with the Bureau of Labor Statistics making “imputation” estimates for up to 40% of the data. Several economists have warned that these figures may be significantly distorted. If the true inflation rate is higher than the official data and the true unemployment rate is also higher than the official data, then the interest rate cut decisions made by the Federal Reserve (FED) based on distorted data may be incorrect.

The third explanation is the lag effect. The unemployment rate is a lagging indicator that reflects the economic conditions of the past few months. When the unemployment rate begins to rise, a recession may have already started. Historical experience shows that once the unemployment rate begins to trend upward, it tends to worsen for several quarters. If this follows the same pattern, the unemployment rate may further rise to 5-6% by 2026, at which point the recession will be undeniable.

Zeberg's core argument is that the Federal Reserve (FED) is too focused on inflation data (2.7% shows mildness) and ignores the more important recession signal of rising unemployment. When the Federal Reserve (FED) worries about inflation during an economic boom and only starts to worry about unemployment during a recession, policies are always a step behind. This “hindsight” policy model is a common issue in central bank decision-making.

The assessment by economist Zeberg implies that the current outlook of the Federal Reserve (FED) underestimates the severity and timing of the impending economic recession. He believes that the FED is still operating effectively without a clear understanding of the next phase of the economic cycle. This criticism, while sharp, is not unfounded. The FED failed to provide timely warnings before the 2008 financial crisis and the 2020 pandemic; will it repeat the same mistake this time?

For investors, Zeberg's warning provides an important risk alert. If the U.S. economy truly enters a recession, risk assets such as the stock market and cryptocurrencies will suffer significant damage. A defensive allocation (increasing cash, gold, and U.S. Treasuries) may be a wise choice. However, caution is also needed: Zeberg's past predictions have not all been accurate, and he may be overly pessimistic. A balanced strategy is to focus on changes in the unemployment rate and other leading indicators, adjusting positions only if trends confirm a deterioration, rather than fully exiting the market based solely on a single economist's warning.