What Is the Sahm Rule Recession Indicator?
The Sahm Rule recession indicator is a simple but powerful tool for identifying recessions in real time. Developed in 2019 by economist Claudia Sahm, the rule looks at unemployment trends to detect when the economy is slipping into contraction.
The rule states:
A recession is underway when the three-month moving average of the national unemployment rate rises by at least 0.5 percentage points relative to its 12-month low.
This approach avoids waiting months for official recession declarations from the National Bureau of Economic Research (NBER) or GDP revisions. Instead, it provides an early, data-driven signal based on one of the most reliable economic indicators: unemployment.
The Formula in Practice
To calculate the Sahm Rule:
- Find the lowest 3-month moving average of unemployment in the past 12 months.
- Subtract it from the current 3-month moving average.
- If the result is ≥ 0.50 percentage points, the rule signals a recession.
Example:
- Current 3-month unemployment average: 4.17%
- Lowest 3-month average in past 12 months: 4.00%
- Difference: 0.17% → below threshold → no recession signal
Once the difference exceeds 0.50%, the indicator flashes red.
Why Claudia Sahm Created the Rule
Claudia Sahm, while at the Federal Reserve, proposed the rule as part of a plan to make fiscal policy more responsive. Her idea was that once the unemployment trigger fired, the government could automatically release stimulus payments to households.
The goal:
- Avoid political delays in approving fiscal aid.
- Deliver support quickly at the start of recessions.
- Provide a systematic and objective way to guide policy.
This automatic stabilizer concept gained traction because recessions often worsen when fiscal responses arrive too late.
Historical Accuracy of the Sahm Rule
The rule’s track record is impressive:
- Since 1950, the Sahm Rule has signaled all 11 U.S. recessions.
- On average, it triggers within 3 months of a recession’s start.
- It beats NBER announcements, which can lag by 6–18 months.
- Only one false positive occurred—in 1959. Even then, a recession followed within six months.
This accuracy stems from unemployment’s role as a lagging but decisive indicator. When joblessness rises meaningfully, consumer spending and business confidence fall, reinforcing the downturn.
Limitations and False Positives
While highly reliable, the Sahm Rule isn’t perfect.
- Labor Supply Shifts: If unemployment rises because more people enter the workforce (e.g., immigration surges, retirees returning, or graduates flooding the market), the indicator may trigger without an actual demand-driven recession.
- Pandemic Distortions: In 2024, the rule briefly triggered as workers reentered the labor force post-COVID, even though demand for labor remained strong. No true recession followed.
- Lag in Policy Impact: Even if the Sahm Rule signals accurately, fiscal or monetary responses may not arrive in time to cushion the economy.
Comparing the Sahm Rule to Other Indicators
| Indicator | Type | Strengths | Weaknesses |
|---|---|---|---|
| Sahm Rule | Real-time | Simple, reliable, low false positives | Can misfire if labor supply drives unemployment |
| GDP (2 quarters negative) | Confirmatory | Widely recognized, intuitive | Reported with lag, revisions common |
| Yield Curve (10y–2y inversion) | Predictive | Historically strong lead indicator | False positives (e.g., 2022–24) |
| NBER Declaration | Official benchmark | Comprehensive, authoritative | Often lags recession start by 6–18 months |
The Sahm Rule stands out as a confirmation tool—not predictive like the yield curve, but faster and more reliable than GDP or NBER data.
Investor Applications of the Sahm Rule
Though designed for policymakers, the Sahm Rule also matters to investors and traders.
When the indicator crosses the 0.5% threshold:
- Equities: Investors may shift from cyclical stocks (consumer discretionary, industrials) into defensive stocks (utilities, healthcare, staples).
- Bonds: Rising recession risk often boosts demand for Treasuries and investment-grade bonds.
- Hedging: Traders may use put options or volatility strategies to protect portfolios.
- Opportunistic Plays: Aggressive investors might pursue short selling or buy assets at depressed prices during downturns.
By aligning strategies with the Sahm Rule’s signal, investors can move ahead of official announcements, gaining a timing edge.
Current Reading (September 2025)
- U.S. unemployment rate (August 2025): 4.1%
- 3-month moving average: 4.17%
- 12-month low average: 4.00%
- Difference: 0.17%
Result: The Sahm Rule does not currently indicate a recession, though risks are elevated compared to 2023–24 lows.
Key Criticisms from Economists
- Too reactive: By the time unemployment rises, businesses and households may already feel the recession.
- Policy overreliance: Using one trigger could prompt excessive fiscal spending if misapplied.
- Unique shocks: Events like pandemics or labor market distortions can reduce reliability.
Still, most analysts agree the Sahm Rule is among the most practical and transparent recession tools available.
Conclusion
The Sahm Rule recession indicator offers policymakers, economists, and investors a timely, accurate method to confirm recessions. Since 1950, it has consistently signaled downturns with very few false alarms, giving it credibility unmatched by many indicators.
