What Is The Sahm Rule

The Sahm Rule: A Key Indicator for Predicting Recessions

What is the Sahm Rule?

The Sahm Rule is a macroeconomic indicator that assesses the likelihood of a recession based on changes in the unemployment rate. It was developed by Claudia Sahm, a former Federal Reserve economist, and is widely recognized as a reliable indicator of economic downturns.

How Does the Sahm Rule Work?

The Sahm Rule tracks the three-month moving average of the national unemployment rate (U3). When this average rises above a certain threshold, it signals the onset of a recession. The current threshold is set at 0.50 percentage points.

The rationale behind the Sahm Rule is that a sustained increase in unemployment typically indicates a weakening economy. As businesses reduce their workforce in response to declining demand, the unemployment rate rises, providing an early warning sign of an impending recession.

Current Status of the Sahm Rule

As of January 2023, the Sahm Rule stands at 0.37, indicating "Normal odds" of a recession. While this value is below the recession threshold, it has been trending upward in recent months, suggesting that the economy may be facing headwinds that could lead to a downturn in the future.

Importance of the Sahm Rule

The Sahm Rule is a valuable tool for policymakers, economists, and market participants. It provides an early indication of potential economic weakness, allowing them to take proactive measures to mitigate the impact of a recession. By tracking the Sahm Rule and other economic indicators, investors can make informed decisions about their portfolios and prepare for potential downturns.