The SAHM Rule has recently gained attention as a key indicator of potential economic downturns.
With stock markets showing signs of stress, investors are increasingly relying on this simple yet historically reliable measure to determine whether the U.S. economy is heading toward a recession.
But what exactly is the SAHM Rule, and why is it so important? With words about this making rounds everywhere, a piece of content helping you understand important things about the rule and how it applies to the U.S economy cannot be more timely.
What is the SAHM Rule?
The SAHM Rule, introduced in 2019 by economist Claudia Sahm, is a recession indicator that looks at unemployment trends.
Specifically, it triggers a recession warning when the three-month moving average of the U.S. unemployment rate increases by 0.5 percentage points or more from its 12-month low.
This rule has been praised for its simplicity and accuracy in detecting the onset of a recession, giving it a reputation as one of the most trusted economic indicators.
Sahm herself has commented on the rule's reliability, though she notes that it is not perfect. "We are not in a recession now – contrary to the historical signal from the SAHM Rule — but the momentum is in that direction," she said in a recent interview.
While the rule is designed to highlight early signs of a downturn, it doesn’t guarantee that a recession is imminent.
How Does the SAHM Rule Fit into Broader Financial Concerns?
The SAHM Rule is one of several financial rules that economists and policymakers use to assess the health of the economy. On August 20, the U.S. unemployment rate rose slightly, prompting investors to worry that the Federal Reserve might not act quickly enough to prevent a potential recession.
Historically, when the SAHM Rule is triggered, it suggests that unemployment could rise much higher, reflecting deeper recessionary conditions. "It is about reflexivity," explained Dario Perkins, managing director of global macro at TS Lombard. He emphasized that the rule indicates a likely rise in unemployment if the early signs are not addressed.
Policymakers at the U.S. Federal Reserve are keeping a close eye on economic indicators like the SAHM Rule as they navigate decisions around interest rates.
On August 28, Fed Chair Jerome Powell hinted that interest rate cuts could be on the table in September, a move that might ease some economic pressure. And in September, the rate cut was implemented!
The SAHM Rule and the Recession Debate
While the SAHM Rule is currently flashing warning signs, not everyone agrees that a recession is inevitable. Claudia Sahm herself has noted that the U.S. economy is in a strong position, despite the rising unemployment rates.
“We are in a place where things have slowed. So, we’re not in contraction territory,” she said, pointing to factors like consumer spending and household income that remain strong.
Nevertheless, the rule serves as a warning that economic conditions could deteriorate if not addressed. Weak job data in July and early August have only heightened concerns, as many believe the Federal Reserve may have waited too long to cut interest rates.
"The economy is in a good place – it just needs some pressure taken off it," Sahm commented, reflecting her optimism that the Fed still has room to maneuver.
Final Note
In the world of economic indicators, the SAHM Rule stands out for its simplicity and accuracy in predicting the onset of recessions.
While the recent rise in unemployment has triggered this important financial rule, experts like Claudia Sahm caution that a recession isn’t guaranteed.
However, with growing concerns about rising unemployment and interest rate policy, the SAHM Rule serves as a critical reminder for policymakers to act carefully and avoid further economic stress.