A particular recession indicator, the “Sahm Rule,” developed by economist Claudia Sahm, is garnering attention due to its perfect track record in predicting US recessions since 1970. The Sahm Rule triggers when the three-month average of the unemployment rate rises by 0.5 percentage points or more relative to its minimum over the previous 12 months.
Currently, this indicator is close to triggering, with the three-month average unemployment rate hovering around 3.7%, only 0.3 percentage points above its recent low. While not officially triggered, its proximity is fueling concerns about a potential economic downturn.
The article explores the historical accuracy of the Sahm Rule and its simplicity as a warning sign. Unlike complex economic models, the Sahm Rule is straightforward and easy to understand, focusing solely on the unemployment rate’s movement. This simplicity has contributed to its credibility as a timely recession predictor.
The article notes that the indicator does not predict the severity or duration of a recession, only its onset. Its potential triggering now highlights the vulnerability of the US economy, particularly in light of the Federal Reserve’s efforts to combat inflation through interest rate hikes, which could further impact the labor market.
find the original article here: https://finance.yahoo.com/news/recession-indicator-hasnt-wrong-59-080600943.html