Sahm Rule
The Sahm Rule is a real-time recession indicator developed by economist Claudia Sahm that signals the start of a recession when the three-month moving average of the national unemployment rate rises by 0.5 percentage points or more above its low from the prior 12 months.
Claudia Sahm developed the rule while working at the Federal Reserve, originally as a mechanism for triggering automatic stabilizer payments (stimulus checks) in response to deteriorating labor market conditions without requiring legislative action. The rule was published in a 2019 Hamilton Project paper and quickly gained adoption as a clean, timely recession indicator.
The logic is intuitive: because unemployment typically rises sharply and persistently once a recession begins, a meaningful increase in the unemployment rate from its recent low is a strong signal that the economy has crossed into contraction. The 0.5 percentage point threshold was calibrated against historical US recessions to minimize false positives while capturing genuine downturns quickly after they begin.
Historically through 2023, the Sahm Rule had a perfect track record of firing during every US recession since 1970 without generating false positives. The indicator triggered in real time during the 2020 COVID recession when unemployment surged from roughly 3.5% to double digits in two months — the fastest labor market deterioration in modern history.
In July 2024, the Sahm indicator triggered when US unemployment rose from a low of 3.4% to above 3.9%, crossing the 0.5 percentage point threshold. Notably, Claudia Sahm herself cautioned that the rule might be generating a false positive in this instance, attributing the unemployment rise partly to labor supply increases (particularly immigration-driven expansion of the labor force) rather than the layoff-driven deterioration that typifies recessions. This episode highlighted that mechanical rules based on statistical regularities can behave differently when the underlying structural dynamics change.
The Sahm Rule is widely followed in real time by investors and economists as a labor market tripwire. It complements the yield curve recession signal by focusing on realized labor market outcomes rather than forward-looking financial market signals, making the two indicators useful in combination.