The ‘Sahm Rule’ was developed by noted economist Claudia Sahm, chief economist at New Century Advisors. There is an explanation of it below (scroll down).
Sahm was interviewed (Fortune) on it after the July employment report (Forexlive Americas FX news wrap 2 Aug: Bond market cuts rate for Fed after weak jobs data) triggered it:
- “I am not concerned that, at this moment, we are in a recession,”
- “no one should be in panic mode today”
- Sahm noted that household income is still growing, while consumer spending and business investment remain resilient.
- there are key measures of the economy that “still look really good.”
- “This time really could be different,” Sahm said. “[The Sahm Rule] may not tell us what it’s told us in the past, because of these swings from labor shortages, with people dropping out of the labor force, to now having immigrants coming lately. That all can show up in changes in the unemployment rate, which is the core of the Sahm Rule.”
Further (CNBC quoting an email from Sahm):
- “We are not in a recession now — contrary [to] the historical signal from the Sahm rule — but the momentum is in that direction,”
- “A recession is not inevitable and there is substantial scope to reduce interest rates.”
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The SAHM rule is a simple indicator used to signal the start of a recession in the United States. It was developed by economist Claudia Sahm and is based on changes in the unemployment rate.
How it Works:
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The SAHM rule calculates the difference between the current three-month average unemployment rate and its lowest value over the previous 12 months.
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If this difference exceeds 0.50 percentage points, the rule suggests that the economy is likely entering a recession.
The idea behind the SAHM rule is that a significant and sustained increase in the unemployment rate is a reliable early signal of economic downturns. It is a straightforward and timely indicator that helps policymakers and analysts identify the onset of recessions.
The SAHM rule is valued for its simplicity and effectiveness in providing an early warning of economic downturns without relying on complex economic models or forecasts.
This article was written by Eamonn Sheridan at www.forexlive.com. Source