What is Sahm Rule?
Sahm invented
Looking back at U.S. history, whenever the unemployment rate rises, even if the increase is small, it almost always predicts that the economy is in recession—this pattern was first published in a 2019 paper by former Federal Reserve economist Claudia Sahm proposed in. Her analysis became known as the “Sahm Rule” and is considered a recession indicator.
Rule
The rule, developed by former Federal Reserve economist and columnist Claudia Sahm, assumes that the economy begins to enter a recession when the three-month moving average of the unemployment rate rises 0.5 percentage point or more from the previous 12-month low.
Historical verification
| Unemployment rate % | Sahm value | Time when Sahm > 0.5 | Recession starts… |
|---|---|---|---|
| 3.50% | 0.63 | Nov 1953 | 4 months prior (Jul 1953) |
| 4.50% | 0.50 | Oct 1957 | 2 months prior (Aug 1957) |
| 5.80% | 0.60 | Nov 1959 | 5 months later (Apr 1960) |
| 4.40% | 0.77 | Mar 1970 | 3 months prior (Dec 1969) |
| 5.50% | 0.60 | Jul 1974 | 8 months prior (Nov 1973) |
| 6.30% | 0.53 | Feb 1980 | 1 month prior (Jan 1980) |
| 8.30% | 0.60 | Nov 1981 | 4 months prior (Jul 1981) |
| 5.90% | 0.53 | Oct 1990 | 3 months prior (Jul 1990) |
| 4.50% | 0.50 | Jun 2001 | 3 months prior (Mar 2001) |
| 4.90% | 0.53 | Feb 2008 | 2 months prior (Dec 2007) |
| 14.80% | 4.00 | Apr 2020 | 2 months prior (Feb 2020) |
| 4.30% | 0.50 | Aug 2024 | – |
100% Accuracy
With 11 recessions occurring since 1950, Sahm Rule backtest is 100% accurate and is a reportable recession indicator.
Unusual events may cause distortions
Sahm herself expressed reservations that the rule she pioneered was based on historical patterns, but that the economy could be distorted if it was affected by unusually unpredictable events, such as the disruption of the new coronavirus epidemic. “Sahm Rule” may not apply in this unusual situation.
Sahm said: Sahm’s rule is an empirical law. It is not a proposition or a natural law.
Latest cases
Fed to start raising interest rates
On July 31, the Federal Reserve announced that it would maintain its benchmark interest rate at a range of 5.25% to 5.5%, and Chairman Jerome Powell also hinted at the possibility of a rate cut in September.
Unemployment rate rose to 4.3% in August
The latest data released on the evening of August 2 showed that non-farm employment increased by only 114,000 in July, a new low in three and a half years. The U.S. unemployment rate in July increased by 0.2 percentage points from the previous month to 4.3%, exceeding market expectations of 4.1% and approaching a three-year high. Economists have previously pointed out that even if the unemployment rate rises by only 0.1 percentage points in July, it will trigger the “Sam’s Rule”, a leading indicator with an accuracy of 100% in predicting an economic recession.
According to the latest unemployment rate calculation, the U.S. unemployment rate has soared by 0.6% from the low point this year. After several months of unexpected surges in the unemployment rate, the Sam rule, which predicts recession based on the unemployment rate, has finally been triggered, which may mean that the U.S. economy has begun Entering recession.
Poor corporate financial reports
Most of the second-quarter financial reports of major U.S. listed companies have been announced. Except for a few that performed well, most fell short of investors’ expectations. U.S. stocks have experienced sharp ups and downs in the past two weeks, which is completely different from the performance in the first half of the year.
U.S. stocks plummeted on August 2
Sure enough, on August 2, when Sam’s Rule, a 100% accurate economic recession indicator, was triggered, the U.S. stock market plummeted that day:
- The Dow Jones Industrial Average fell 494.82 points, or 1.21%, to close at 40,347.97 points.
- The Nasdaq fell 405.26 points, or 2.3%, to 17,194.15.
- The S&P 500 fell 75.62 points, or 1.37%, to close at 5,446.68.
- The Philadelphia Semiconductor Index fell 373.60 points, or 7.14%, to close at 4,859.59 points.
- CBOE Volatility Index VIX surged 4.8 points, a surge of 25.82%, to close at 23.82 points.
Cconclusion
All this points to the fact that the Federal Reserve will almost certainly start to cut interest rates, which also shows that the U.S. economic situation is beginning to reverse.
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