America may soon be in recession, according to a famous rule

Nov 14th 2023

Developed by Claudia Sahm, a former economist at the Federal Reserve, in 2019, the rule would have been capable of identifying every recession since 1960 in its early stages

If the unemployment rate increases by half a percentage point from its trough of the past 12 months, the economy is said to be in a recession. To smooth out the figures, which jump around, both the current unemployment rate and the trough are measured as three-month moving averages. At present the Sahm indicator stands at 0.33 percentage points. It would not take much for it to reach the half-point mark. If the unemployment rate, which hit 3.9% in October, rises to 4.0% this month and 4.1% next month, the economy would, according to the Sahm rule, be in a recession.


What about in reality? As Ms Sahm herself is quick to point out, her rule describes an empirical regularity, not an immutable law. What is more, the post-pandemic economy may have fostered the exact kind of conditions that violate this regularity. During downturns companies fire workers, and the layoffs typically go well beyond the Sahm rule’s half-point line.
This time, though, the increase in the jobless rate appears to have been driven less by a reduction in demand for workers and more by an increase in their supply. The American labour force, including both people in work and looking for jobs, has expanded by nearly 3m, or 1.7%, since the end of last year. During that same time the number of jobs has increased by about 2m, or 1.2%.


For Ms Sahm the sudden fame of her measure has brought with it an additional wrinkle. She has had to grapple with the world taking her rule in a different direction from her initial intent. Ms Sahm was not trying to get into the forecasting business, much less into timing financial markets. Rather, she wanted to come up with a benchmark for triggering automatic payments to individuals in order to insulate them from a recession. “Many people have asked me if we are going into a recession,” she says. “Almost no one has asked me what policymakers can do about it.”
Considering the paralysis in Congress, it is a fair bet that policymakers will not do much of anything if unemployment continues to rise in the coming months. So Ms Sahm is now in the curious position of rooting against her own rule, and hoping that America skirts a recession.

Ms Sahm was not trying to get into the forecasting business, much less into timing financial markets. Rather, she wanted to come up with a benchmark for triggering automatic payments to individuals in order to insulate them from a recession.