The Sahm Rule: A Predictor of Recessions?
Introduction
The rise in unemployment to 3.9% last month has raised concerns about a potential recession. This increase in joblessness is getting closer to triggering the Sahm Rule, which has historically been a reliable predictor of recessions. Claudia Sahm, a former Federal Reserve economist and now Bloomberg columnist, developed this rule as a way to identify the start of a recession based on changes in the unemployment rate.
What is the Sahm Rule?
The Sahm Rule states that a recession begins when the three-month moving average of the unemployment rate rises by a half-percentage point or more compared to its lowest point in the previous 12 months. The low point for joblessness this year was 3.4%, while October’s rate was 3.9%, the highest so far in 2021. This increase in unemployment is concerning, but according to Sahm, the Sahm Rule has not been triggered or is on the edge of being triggered.
Is the Sahm Rule Reliable?
The Sahm Rule has gained attention due to its reliability in predicting recessions in the past. Sahm herself has expressed concerns that her creation has become a “monster,” as it continues to hold strong without breaking. However, Sahm also noted in a recent social media post that she would be happy if the Sahm Rule were to break now, indicating a desire for economic stability.
Looking Ahead
While the rise in unemployment is worrisome, it does not necessarily mean that a recession is imminent. The Sahm Rule serves as a cautionary tool, providing insights into potential economic downturns. It will be interesting to see how the job market evolves in the coming months and whether the Sahm Rule will be triggered.
