Sahm Recession Indicator: A Signal of Economic Downturn
Understanding the Sahm Rule
The Sahm rule, developed by economist Claudia Sahm, aims to provide an early warning system for economic recessions. It measures the three-month moving average of the national unemployment rate (U3). When this average rises sharply, it indicates a potential economic downturn.
How the Sahm Rule Works
According to the rule, a recession is likely underway if the three-month moving average of the U3 unemployment rate increases by 0.50%. This threshold is designed to identify periods of significant job losses, which are often associated with economic contractions.
The timeliness of the Sahm rule is one of its strengths. By using data that is available almost immediately, it can provide a rapid signal of potential economic distress. This allows policymakers and businesses to take proactive measures to mitigate the impact of a recession.
Current Indicators and Outlook
As of August 2023, the three-month moving average of the U3 unemployment rate stands at 3.9%. While this is above the historical low of 3.5% seen in February 2020, it remains below the 0.50% threshold that would trigger a Sahm rule recession signal.
However, recent economic data suggests that the U3 unemployment rate may be on the rise. The number of new jobless claims, a leading indicator of layoffs, has increased in recent weeks. This could indicate that the labor market is beginning to weaken, which could potentially lead to a Sahm rule trigger in the coming months.
Conclusion
The Sahm Recession Indicator is a valuable tool for monitoring the health of the economy. While it is not an absolute predictor of recessions, it can provide an early warning signal of potential economic distress. As the U3 unemployment rate continues to rise, it is essential to keep a close eye on the Sahm rule to assess the likelihood of a recessionary period ahead.
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