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{{Short description|Method of determining when the economy has entered a recession}}
[[File:Sahm rule.webp|thumb|Sahm rule 1949-20232024]]
In macroeconomics, the '''Sahm rule''', or '''Sahm rule recession indicator''', is a [[heuristic]] measure by the United States' [[Federal Reserve]] for determining when an economy has entered a [[recession]].<ref>{{Cite news |date=2019-10-04 |title='Sahm Rule' enters Fed lexicon as fast, real-time recession flag |language=en |work=Reuters |url=https://www.reuters.com/article/us-usa-fed-sahm-idUSKBN1WJ12J |access-date=2023-01-12}}</ref> It is useful in real-time evaluation of the [[business cycle]] and relies on monthly unemployment data from the [[Bureau of Labor Statistics]] (BLS). It is named after economist [[Claudia Sahm]], formerly of the Federal Reserve and [[Council of Economic Advisers|Council of Economic Advisors]].
 
The Sahm rule states:<ref>{{Cite web|last=Dr. Sahm|first=Claudia|date=2022-12-30|title=The Sahm rule: I created a monster.|url=https://stayathomemacro.substack.com/p/the-sahm-rule-i-created-a-monster|access-date=2024-07-31|website=Substack|language=en-US}}</ref>:
{{Blockquote|text=When the three-month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months, we are in the early months of recession.}}
 
== OriginationOrigin ==
The Sahm rule originates from a chapter in the [[Brookings Institution]]'s report on the use of fiscal policy to stabilize the economy during recessions.<ref>{{Cite web|last=Shambaugh|first=Heather Boushey, Ryan Nunn, and Jay|date=2019-05-16|title=Recession ready: Fiscal policies to stabilize the American economy|url=https://www.brookings.edu/multi-chapter-report/recession-ready-fiscal-policies-to-stabilize-the-american-economy/|access-date=2020-12-20|website=Brookings|language=en-US}}</ref> The chapter, written by Sahm, proposes fiscal policy to automatically send stabilizing payments to citizens to boost economic well-being. InsteadBy ofautomating relyingthis onprocess humanshe intuitionsaw the opportunity to determineget whenaid suchto paymentspeople shouldfaster. beBecause sent,the Sahmsooner outlinesthe ahelp conditionwas todistributed triggerin theher payments.<refview name=":1">{{Citethe web|last=Sahm|first=Claudia|date=2019-05-16|title=Directbetter stimulusthe paymentsodds tothat individuals|url=https://www.brookings.edu/research/direct-stimulus-payments-to-individuals/|access-date=2020-12-20|website=Brookings|language=en-US}}</ref>small Thebusiness triggercan suggestedstay indicatesopen anand economythat beginningpeople acould recessionstay andin istheir nowhomes knownand askeep thetheir ''Sahm rule''jobs. The SahmHer rule recessionshould indicatorthereby wasfunction alsoas featuredan early inwarning ato Goldmandetect Sachsthe U.S.early economicstages researchof reportan byrecession economistand [[Williamthen C.to Dudley]].<ref>{{Citestep web|last=vanin Vuuren|first=Dwaine|date=2024-01-01|title=Theand Sahmhelp Rulemanage Redux|url=https://recessionalert.com/sahm-rule-redux/|access-date=2024-07-31|website=RecessionALERT|language=en-US}}</ref>the Andrecession Edwardon McKelvey,autopilot awith seniordirect economistpayments atto Goldmanindividuals Sachs,when hasconditions alsoget been credited with using the idea very earlybad.<ref>{{Cite web|last=ShedlockSahm|first=Mike Claudia|date=2024-08-0212|title=TheAre McKelveyWe (Sahm)in Unemployment Ratea Recession? The Sahm Rule JustSays Yes. It’s Creator Says Not So TriggeredFast|url=https://mishtalkwww.youtube.com/economics/thewatch?v=_PCDteczVg4|access-mckelveydate=2024-sahm08-unemployment-rate-recession-rule-just-triggered/17|website=Bloomberg Big Take audio podcast on Youtube|language=en-US}}</ref>
 
Instead of relying on human intuition to determine when such payments should be sent, Sahm outlines a method-based case to trigger the payments.<ref name=":1">{{Cite web|last=Sahm|first=Claudia|date=2019-05-16|title=Direct stimulus payments to individuals|url=https://www.brookings.edu/research/direct-stimulus-payments-to-individuals/|access-date=2020-12-20|website=Brookings|language=en-US}}</ref> The trigger suggested indicates an economy beginning a recession and is now known as the ''Sahm rule''. Different thresholds have been used for similar purposes—for example [[William C. Dudley]] wrote in 2000 an increase in the unemployment of over one-third of a percent would predict a recession—but Sahm has written that her rule (and its accompanying threshold) is specifically suited as an indicator of the early stages of a recession for the purposes of a fiscal policy response.<ref name="u905">{{cite web | last=Sahm | first=Claudia | title=No, you didn't invent the Sahm rule and that's ok, we need more tools! | website=Substack | date=2024-03-29 | url=https://stayathomemacro.substack.com/p/no-you-didnt-invent-the-sahm-rule?utm_source=profile&utm_medium=reader2 | access-date=2024-09-10}}</ref>
== Commentary ==
 
Dr. Sahm cautionscautioned: {{blockquote|"The Sahm rule is an empirical regularity. It’s not a proposition; it’s not a law of nature."
}}
And she further explainsexplained: {{blockquote|"I created the Sahm rule to send out stimulus checks automatically. The idea was to act fast to make the recession less severe and help families. The star was always the stimulus check, not the indicator that other people named after me.<ref>{{Cite web|last=Dr. Sahm|first=Claudia|date=2022-12-30|title=The Sahm rule: I created a monster.|url=https://stayathomemacro.substack.com/p/the-sahm-rule-i-created-a-monster|access-date=2024-07-31|website=Substack|language=en-US}}</ref>"
}}
 
=== Implementation ===
The Sahm rule was published by The [[Federal Reserve Bank of St. Louis|St. Louis Federal Reserve]] bank's [[Federal Reserve Economic Data]] (FRED) system in October 2019.<ref>{{Cite web|date=2019-10-16|title=FRED Adds Sahm Rule Recession Indicators {{!}} St. Louis Fed|url=https://research.stlouisfed.org/publications/research-news/fred-adds-sahm-rule-recession-indicators|archive-url=https://web.archive.org/web/20191016192630/https://research.stlouisfed.org/publications/research-news/fred-adds-sahm-rule-recession-indicators|url-status=dead|archive-date=2019-10-16|access-date=2020-12-20}}</ref><ref>{{Cite web|title=FRED Adds Sahm Rule Recession Indicators {{!}} St. Louis Fed Economic Research|date=2 October 2019 |url=https://news.research.stlouisfed.org/2019/10/fred-adds-sahm-rule-recession-indicators/|access-date=2020-12-21|language=en-US}}</ref> It is retroactively calculated to evaluate performance from past recessions. The recession rule is defined as:
 
Line 24 ⟶ 25:
The rule only relies on a single data series, national unemployment, which is published monthly by the [[Bureau of Labor Statistics|BLS]]. This differentiates the index from other recession indicators based on statistical models, which may rely on dozens of inputs.<ref>{{Cite journal|last=Berge|first=Travis J.|date=2015-05-13|title=Predicting Recessions with Leading Indicators: Model Averaging and Selection over the Business Cycle|url=http://dx.doi.org/10.1002/for.2345|journal=Journal of Forecasting|volume=34|issue=6|pages=455–471|doi=10.1002/for.2345|issn=0277-6693|url-access=subscription}}</ref> Further, unemployment can be more easily understood than complex financial series.<ref>{{Cite news|last=Schneider|first=Howard|date=2019-10-04|title='Sahm Rule' enters Fed lexicon as fast, real-time recession flag|language=en|work=Reuters|url=https://www.reuters.com/article/us-usa-fed-sahm-idUSKBN1WJ12J|access-date=2020-12-20}}</ref><ref name=":0">{{Cite web|title=The Sahm Rule With The Eponymous Economist : The Indicator from Planet Money|url=https://www.npr.org/2019/11/26/783120728/the-sahm-rule-with-the-eponymous-economist|access-date=2020-12-21|website=NPR.org|language=en}}</ref>
 
== Historical Accuracyaccuracy ==
The Sahm rule is a robust tool that has been very accurate in identifying a downturn in the [[business cycle]] and almost always doesn't trigger outside of a recession. The simplicity of the calculation contributes to its reliability. The Sahm rule signals the early stages (onset) of a recession and generated only two false positive recession alerts since the year 1959 (there have been 11 recessions since 1950); in both instances — in 1959 and 1969 — it was just a little untimely, with the recession warning appearing a few months before a slide in the U.S. economy began.<ref>{{Cite news|date=2024-08-02|title=U.S. employers likely added 175,000 jobs in July as labor market cools gradually|url=https://apnews.com/article/economy-jobs-unemployment-federal-reserve-inflation-22095766804d9c1532b4fcc29565be49|access-date=2024-08-02|website=AP - The Associated Press, Washington|language=en}}</ref> In the case of the false positive warning related to the year 1959 it was followed by an actual recession six months later. The Sahm rule typically signals a recession before [[GDP]] data makes it clear.<ref>{{Cite web|date=2024-01-01|title=Sahm Rule Recession Indicator|url=https://www.currentmarketvaluation.com/models/sahm-rule.php|website=Current Market Valuation (CMV) by Gramalam, LLC|language=en-US}}</ref>
 
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In summary, the Sahm rule's reliability lies in its consistent performance throughout various economic climates, particularly in signaling the beginning of a recession with a high degree of accuracy.
 
== Trigger threshold of theTwo-sided Sahm Rulerule modifications==
Economists Pascal Michaillat and [[Emmanuel Saez]] have created a two-sided Sahm rule-based indicator<ref>{{Cite web|date=2024-08-11|title=General Economics - Has the Recession Started?|last1=Michaillat|first1=Pascal|last2=Saez|first2=Emmanuel|url=https://arxiv.org/abs/2408.05856|access-date=2024-08-17|website=arXiv|language=en}}</ref> (which the Financial Times named the 'Michez rule'<ref>{{Cite news|date=2024-08-16|title=Simple indicators of whether the US is in recession are flawed - Investors are going to have to live with some uncertainty|last=Keynes|first=Soumaya|url=https://www.ft.com/content/8e8f22b7-9234-4fdf-a5c4-0a5e18fb65fb|access-date=2024-08-17|website=Financial Times|language=en}}</ref>), using both the unemployment rate and also the vacancy rate for jobs. The economists noted that their modified indicator functioned for recessions going back to the year 1930,<ref>{{Cite news|date=2024-08-12|title=There's a 40% chance the US economy is already in a recession, according to a new indicator|last=Cloonan|first=Kelly|url=https://www.businessinsider.com/sahm-rule-claudia-recession-new-indicator-michaillat-saez-unemployment-jobs-2024-8|access-date=2024-08-17|website=Business Insider|language=en}}</ref> while Sahm's worked only back to the 1950s. Another notable difference: The 'Michez rule' is usually triggered earlier than the Sahm rule as it detects recessions on average 1.4 months after they have started.<ref>{{Cite web|date=2024-08-11|title=General Economics - Has the Recession Started?|last1=Michaillat|first1=Pascal|last2=Saez|first2=Emmanuel|url=https://arxiv.org/abs/2408.05856|access-date=2024-08-17|website=arXiv|language=en}}</ref>
The nowadays more commonly used rule triggers a recession signal when the Sahm metric is crossing above 0.5%. Economist William C. Dudley recommended a lower trigger of 0.33%<ref>{{Cite web|last=van Vuuren|first=Dwaine|date=2024-01-01|title=The Sahm Rule Redux|url=https://recessionalert.com/sahm-rule-redux/|access-date=2024-07-31|website=RecessionALERT|language=en-US}}</ref>, and economist Edward McKelvey recommended an even lower trigger of 0.3%.<ref>{{Cite web|last=Shedlock|first=Mike |date=2024-08-02|title=The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered|url=https://mishtalk.com/economics/the-mckelvey-sahm-unemployment-rate-recession-rule-just-triggered/|language=en-US}}</ref> Macro-economic writer Mike Shedlock recommends a trigger threshold of 0.4 as the best compromise halfway between McKelvey and Sahm, because as he explains, this already reduces the average lag time of the recession alert to just roughly one month (from a lag time of on average three months when using 0.5), while not producing too many false positives (but he uses a slightly different rounding in his calculation).
{{block indent|1=
"A trigger of 0.4 percent rounded to a single decimal point does a better job of weeding out false positives [than McKelvey or Dudley] without the lags of Sahm straight up."<ref>{{Cite web|last=Shedlock|first=Mike |date=2024-08-02|title=The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered|url=https://mishtalk.com/economics/the-mckelvey-sahm-unemployment-rate-recession-rule-just-triggered/|language=en-US}}</ref>
}}
 
'''Analysis of each trigger threshold: lead-lag times'''
 
* A trigger of 0.3 leads the actual recession start in three cases by two months and in one case by one month
* A trigger of 0.4 leads the actual recession start in two cases by one month<ref>{{Cite web|last=Shedlock|first=Mike |date=2024-08-02|title=The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered|url=https://mishtalk.com/economics/the-mckelvey-sahm-unemployment-rate-recession-rule-just-triggered/|language=en-US}}</ref>
* A trigger of 0.5 leads the actual recession start in no case
 
'''Analysis of each trigger threshold: false positive warnings'''
 
* A trigger of 0.3 produces five (to six) false positive alerts
* A trigger of 0.4 produces two false positive alerts<ref>{{Cite web|last=Shedlock|first=Mike |date=2024-08-02|title=The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered|url=https://mishtalk.com/economics/the-mckelvey-sahm-unemployment-rate-recession-rule-just-triggered/|language=en-US}}</ref>
* A trigger of 0.5 produces one false positive alert
 
==Employment-to-population Sahm rule modifications==
Rounding: Mike Shedlock explains that he takes the headline U.S. unemployment rate to three decimal places and then rounds to two. As example for July 2024, the widely used Sahm rule calculates a value of 0.53, while Shedlock calculates a value of 0.49.<ref>{{Cite web|last=Shedlock|first=Mike |date=2024-08-02|title=The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered|url=https://mishtalk.com/economics/the-mckelvey-sahm-unemployment-rate-recession-rule-just-triggered/|language=en-US}}</ref>
Morgan Stanley economists have constructed an indicator which has the same 0.5% recession threshold as the Sahm rule, but uses the employment-to-population, or EPR, ratio. It emphasizes the ratio of employed individuals to the total working-age population and may provide a more accurate picture of the labor market's state. The Morgan Stanley economists combined their approach with the modification made by Michaillat and Saez, which uses two thresholds, to create the 'Triumvirate rule'. "The Triumvirate rule has moved to 100% probability of recession within 2 to 6 months after rising above 20% historically, with an average of 3.7 months."<ref>{{Cite news|date=2024-08-19|title=Soft landing still in sight as Sahm Rule recession indicator misses more than hits|last=Ebrahim|first=Yasin|url=https://finance.yahoo.com/news/soft-landing-still-sight-sahm-210843473.html|website=Yahoo! finance|language=en}}</ref>
 
== Reception ==
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Its low rate of false positives are attractive features. Federal Reserve Chair [[Jerome Powell]] characterized the Sahm rule as a "statistical regularity" at a press conference in late July 2024.<ref>{{Cite news|date=2024-07-31|title=Jobs report could trigger closely watched recession indicator|url=https://finance.yahoo.com/news/jobs-report-could-trigger-closely-watched-recession-indicator-144917689.html|access-date=2024-08-01|website=yahoo! finance|language=en}}</ref>
 
While the Sahm rule indicates recessions sooner than the formal NBER recession indications, which can take anywhere from half to two years, it is by no means predictive,<ref>{{Cite web|title=Business Cycle Dating|url=https://www.nber.org/research/business-cycle-dating|access-date=2020-12-21|website=NBER|language=en}}</ref>, when using the 3-month [[Moving average|simple moving average]] as filter (because this smoothing of the U.S unemployment data adds a multiple month lag to the calculation). The commonly used version of the Sahm rule with the smoothed 3-month average triggered approximately three months into each of the last NBER recession starts, with the beginning of the recession retroactively officially determined by the NBER.<ref>{{Cite web|last=Brown|first=Randy|title=This New Rule To Identify Recessions Could Give Investors An Edge|url=https://www.forbes.com/sites/randybrown/2020/01/09/this-new-rule-to-identify-recessions-could-give-investors-an-edge/|access-date=2020-12-21|website=Forbes|language=en}}</ref>
 
A lesser-known feature of the Sahm model is that it is particularly useful in assessing recession ends. The standard 3-month smoothed Sahm rule has on average a minimum two month lag to recession ends (while the unsmoothed-Sahm indicator provides for near perfect coincident signalling of [[Business cycle|business cycle]] troughs), according to Dwaine Van Vuuren.
 
==See also==
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{{reflist}}
== External links ==
 
* National Unemployment: [https://www.bls.gov/news.release/empsit.nr0.htm Monthly BLS data]
 
{{United States – Commonwealth of Nations recessions}}
{{Federal Reserve System}}
 
[[Category:Economic indicators]]
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