Sahm Rule

Sahm Rule

The Sahm rule is a tool used to identify when the U.S. economy has likely entered a recession. It is based on changes in the unemployment rate. According to this rule, a recession is signaled when the three-month average unemployment rate rises by at least 0.5 percentage points above its lowest point over the past 12 months.

This method was developed by economist Claudia Sahm and offers a faster, data-driven way to detect recessions. Traditional methods, like official declarations from the National Bureau of Economic Research (NBER), take months to confirm a recession. The Sahm rule, on the other hand, uses simple and timely labor market data to give an early signal.

For example, during the COVID-19 pandemic in early 2020, the unemployment rate jumped sharply. The Sahm rule quickly indicated that the economy was in recession, well before official announcements were made. This made it a valuable indicator for policymakers and economists who needed to act quickly.

It’s important to note that the Sahm rule is not a forecasting tool. It doesn’t predict future recessions. Instead, it helps confirm when a recession has already begun, based on real-time data.

In finance, having timely indicators like the Sahm rule can help guide decisions around spending, investing, and policy. Understanding this rule can give you a clearer view of where the economy stands and why certain actions are taken in response to job market changes.

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Disclaimer: This post is for informational purposes only and does not constitute financial, legal, or investment advice. Please consult a qualified professional for guidance tailored to your situation.

For personalized support, contact GLOBAL ABAS Consulting, LLC with your specific questions or concerns.

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