Sahm Rule Recession Indicator

This chart plots the real-time Sahm Rule indicator, monthly, over the last ten years, from the FRED series named under the chart. The construction is simple: take the three-month average of the unemployment rate and subtract the lowest three-month average of the previous twelve months. The rule — published by the economist Claudia Sahm — says a reading of 0.50 or above has marked the early months of every US recession in the post-war record it was built on.

The idea behind it is that unemployment rises in a self-reinforcing way once it rises at all. Layoffs cut income, lost income cuts spending, and weaker spending costs the next round of jobs — so a moderate rise from the lows has historically been the start of a much larger one, not a pause. The rule encodes exactly that observation into one number.

For US markets a low, stable reading is the normal background of an expansion. A reading climbing toward the threshold is the labour-market version of a smoke alarm: by construction it can only rise once unemployment has already left its lows, which is why it has historically triggered near the start of recessions rather than years ahead of them — it is a confirmation signal, not a forecast.

The caveats: the rule is a regularity fitted to post-war history, not a law, and its own author has cautioned that a trigger after unusual labour-market dislocations can mislead. It is monthly and inherits every revision of the underlying unemployment survey. And a signal about the economy is not a signal about stock prices — markets and recessions do not keep the same calendar.