What Happens When the Sahm Rule Triggers?

The Sahm Rule, developed by economist Claudia Sahm, triggers when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low over the prior 12 months. It is designed to identify the start of a recession in real time, addressing the problem that official recession dating by the NBER often comes many months after a recession has already begun.

The economic logic is powerful: the labor market is the last shoe to drop in the business cycle. By the time unemployment begins to rise meaningfully, the underlying economic deterioration has been underway for months. And unlike GDP data (which is revised and released with a lag), unemployment claims and the household survey provide relatively timely signals. A 0.5 percentage point rise in unemployment has historically been a point of no return — once it begins, the job losses tend to accelerate as weakening consumer spending feeds back into further layoffs.

The Sahm Rule is particularly valued for its zero false positive rate in modern economic history. Every time it has triggered since 1970, a recession was either underway or about to begin. This makes it arguably the most reliable real-time recession indicator available — it has been more accurate than the yield curve, the LEI, or GDP nowcasts.