Sahm Rule
A recession indicator developed by economist Claudia Sahm: when the 3-month average unemployment rate rises 0.5 percentage points above its 12-month low, the US is typically already in recession.
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What Is the Sahm Rule?
The Sahm Rule is a real-time recession indicator created by economist Claudia Sahm, formerly of the Federal Reserve. The rule states: when the three-month average unemployment rate rises 0.5 percentage points or more above its lowest level in the previous 12 months, the US has typically already entered a recession.
Why It Works
Recessions are typically only confirmed months after they begin (the NBER recession dating committee often declares recessions a year or more after the fact). The Sahm Rule provides an early, quantitative signal that does not require waiting for two consecutive quarters of negative GDP growth.
The logic is straightforward: unemployment rises slowly during normal economic fluctuations but accelerates once businesses begin broad-based layoffs. The 0.5pp trigger corresponds to the point at which momentum in the labour market has shifted enough to indicate a systemic downturn.
Historical Accuracy
The Sahm Rule has triggered before or at the start of every US recession since 1970. False positives have been rare — the indicator is notable for its precision.
The 2024 Debate
In July 2024, the Sahm Rule triggered as unemployment rose from its 2023 low of 3.4% toward 4.3%. However, Claudia Sahm herself argued the trigger might be giving a false signal because the rise in unemployment was driven by labour supply growth (more people entering the workforce) rather than layoffs — an atypical dynamic. This debate highlighted the rule's limitations when structural changes in the labour market are underway.
Monitoring the Sahm Rule
The current Sahm Rule reading is published by the FRED database (St. Louis Fed). The three-month average unemployment rate is compared to the prior 12-month minimum. Watch for:
- Reading approaching 0.4: Recession risk elevated
- Reading at 0.5: Rule has triggered; historically in recession
- Direction: Is the reading trending higher or stabilising?
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