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Overview


The Sahm Rule is an economic indicator that signals the onset of a recession by tracking changes in the unemployment rate. The model asserts that a recession is extremely likely when the three-month moving average of the national unemployment rate rises by at least 0.5 percentage points above its lowest point during the previous 12 months. This rule offers a simple, timely, and accurate method for identifying economic downturns.

In the 11 recessions since 1950, the Sahm rule has triggered during every single one, on average about 3-months into the recession. This is well before NBER officially declares a recession, and before GDP data is available to make it clear. Since 1950 the Sahm rule has indicated only one false positive (in 1959), and even then, six months later the US had entered a recession.

Most recently, (as of December 31, 2023) US unemployment is at 3.7%, with a three-month average of 3.73. This is 0.23% above its low for the previous 12 months. Therefore, the Sahm Rule indicates a Normal risk that we are currently in a recession.

The chart below shows the Sahm Rule indicator over time, as well as each subsequent recession in gray vertical bands. For more information and history about this indicator, continue reading.

Theory & Data


The Sahm Rule was conceptualized by economist Claudia Sahm, formerly of the Federal Reserve and the Council of Economic Advisors. It emerged from a chapter in a Hamilton Project report discussing the use of fiscal policy to stabilize the economy during recessions. Sahm's chapter proposed that fiscal policy should automatically trigger stabilizing payments to citizens to enhance economic well-being during downturns. The rule itself is a condition to initiate these payments, designed as a simple and effective test to indicate when an economy begins a recession. This innovative approach was aimed at reducing reliance on human intuition in determining the timing of such payments, thus offering a more systematic and timely response to economic downturns.

From the text of the paper, Sahm proposed the below heuristic for determining when a downturn has begun:

[A recession can be said to have begun] ... when the three-month average national unemployment rate rises by at least 0.50 percentage points relative to its low in the previous 12 months.

The power and popularity of the Sahm rule is due to its accuracy and simplicity. Its reliance on a single data series, the national unemployment rate, distinguishes it from other recession indicators that often depend on complex statistical models and multiple inputs. The Sahm Rule has been praised for its simplicity and low rate of false positives, offering a quicker indication of recessions compared to the formal process used by the National Bureau of Economic Research, which can take several months to years to officially recognize a recession.

Unemployment Rate

The US civilian unemployment rate (aka "unemployment rate") is the only data series used to calculate the Sahm rule. The unemployment rate is compiled and published by the Bureau of Labor Statistics (BLS), a unit of the United States Department of Labor. The rate represents the percentage of the total labor force that is unemployed but actively seeking employment and willing to work. It is a key indicator used to assess the economic performance of the country, often influencing policy decisions, financial markets, and public perception of the economy's state.

The unemployment rate is updated monthly and is part of the broader Employment Situation Summary, commonly known as the Jobs Report. This report provides a comprehensive overview of various labor market activities, including job additions, average hourly earnings, and the participation rate. The data is collected through two major surveys: the Current Population Survey (CPS), which interviews households, and the Current Employment Statistics (CES) survey, which gathers information from employers.

The unemployment rate is very heavily tracked and can be found and reported in many places, but the original data is published monthly by the BLS.

For the purposes of the Sahm Rule, we look at the three-month moving average of the unemployment rate, as this "smooths out some of the monthly random variation in the rate and avoids false positives". To calculate the Sahm Rule number, we compare the current three-month moving average to the lowest three-month moving average from the prior twelve months -- if that result is more than 0.50, then there is an extremely strong likelihood that we are in a recession.

Recession Risk

In the 11 recessions since 1950, the Sahm rule has triggered during every single one, on average about 3-months into the recession. This is well before NBER officially declares a recession, and before GDP data is available to make it clear. Since 1950 the Sahm rule has indicated only one false positive (in 1959), and even then, six months later the US had entered a recession.

Alternately, the Sahm Rule can be informative about when the economy is likely not in a recession. Since 1950, the economy has never been in a recession whenever the moving average unemployment rate is either at or below the prior twelve-month minimum (i.e., during zero and negative values of the Sahm Rule), so it is fair to say that during these times, there is a relativly low rate of recession.

Current Values & Analysis


The chart below shows the three-month average unemployment rate, as well as the trailing twelve-month minimum. The difference between the two is also shown. This is the Sahm Rule value.

Below again is the same chart showing only the Sahm Rule value, this time with dotted lines indicating the 50bps threshold signaling imminent recession (this is the same chart shown at the top of the page). That's really all there is to it. Values > 0.50% indicate high risk of recession, and values <= 0 indicate very low odds of imminent recession. The gray vertical bands show each recessionary period. You can click and drag within the charts to zoom in on specific periods.

As shown, the most recent three-month average unemployment rate of 3.73 is 0.23% above its low for the previous 12 months. Therefore, the Sahm Rule indicates a Normal risk that we are currently in a recession.

Data Sources


The below table cites all data and sources used in constructing the charts, or otherwise referred to, on this page.

Item Source
Sahm Rule Introductory Paper Direct Stimulus Payments to Individuals, by Claudia Sahm, for The Hamilton Project.
US Civilian Unemployment Rate U.S. Bureau of Labor Statistics

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