The Sahm Indicator is a unemployment based recession indicator developed by a former Federal Reserve member Claudia Sahm. It compares the the 3 month moving average of national unemployment to the prior 12-month period. The indicator triggers when the 3-month average unemployment rate rises 0.50% above the low of the prior 12 months
Methodology
When the 3 month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months, we are in the early months of recession.
The Sahm rule, or Sahm rule recession indicator, is a heuristic tool used by the US Federal Reserve to determine if the economy is in a recession. It was developed by economist Claudia Sahm, who was previously a member of the Federal Reserve and the Council of Economic Advisors. The rule is based on monthly unemployment data from the Bureau of Labor Statistics (BLS) and is useful for real-time evaluation of the business cycle.
The rule states that a recession has begun when the three-month average of the US unemployment rate increases by at least 0.5% from its 12-month low. In July 2024, the rule was triggered when the three-month average reached 0.53 points, above the threshold. However, Sahm has said that she is not concerned about a recession and that people should not panic. She has also noted that the unusual features of the pandemic-driven cycle may challenge the standard relationships of the rule, but that it shouldn’t be completely disregarded.
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In 2007, the unemployment rate rose by 0.5% over 6 months before the 2008 Financial Crisis
Similarly, in 2000, the unemployment rate increased by 0.5% during the 6 months preceding the 2001 recession
Today, in the last 6 months, the unemployment rate has risen by 0.5% again
The most recent data point came in at 4.3%
Indicating that the labor market is potentially weakening
Since 1963, such an increase usually occurs around recessions
The recent unemployment data also triggered the Sahm Rule
Which has a track record of predicting the last 9 recessions
With no false signals yet
The Sahm Rule is a recession indicator developed by economist Claudia Sahm
It identifies the onset of a recession by monitoring increases in the unemployment rate
The rule triggers if the 3-month MA of the unemployment rate rises by 0.5% or more above its 12-month low
Currently, the Sahm Rule sits at 0.53%
Indicating that a recession is near certain if history repeats
Even the labor market conditions index has been steadily declining
Which has often been a precursor to a recession
But there is one issue with the recent jobs report
→ It was skewed by bad weather
A record 1.5 million workers were affected
Which likely affected the numbers
This suggests that the labor market may not be as weak as it appears