Sahm rule: Difference between revisions

{{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.}}

 

 

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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:

 

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>

 

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>

 

 

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.

 

==Two-sided Sahm rule 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>

 

== Reception ==