Sahm rule

[1] It is useful in real-time evaluation of the business cycle and relies on monthly unemployment data from the Bureau of Labor Statistics (BLS).

The Sahm rule states:[2] When the three-month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months, we are in the early months of recession.The Sahm rule originates from a chapter in the Brookings Institution's report on the use of fiscal policy to stabilize the economy during recessions.

[3] The chapter, written by Sahm, proposes fiscal policy to automatically send stabilizing payments to citizens to boost economic well-being.

A rule relying on a fixed level of unemployment, in contrast, cannot take into account drifts caused by changes in demographics, technology, or labor market frictions.

[13][14] The Sahm rule is a robust tool that has been very accurate in identifying a downturn in the business cycle and almost always doesn't trigger outside of a recession.

In summary, the Sahm rule's reliability lies in its consistent performance throughout various economic climates, particularly in signaling the beginning of a recession with a high degree of accuracy.

[26] Morgan Stanley economists have constructed an indicator which has the same 0.5% recession threshold as the Sahm rule, but uses the employment-to-population, or EPR, ratio.

It emphasizes the ratio of employed individuals to the total working-age population and may provide a more accurate picture of the labor market's state.

The Morgan Stanley economists combined their approach with the modification made by Michaillat and Saez, which uses two thresholds, to create the 'Triumvirate rule'.

Federal Reserve Chair Jerome Powell characterized the Sahm rule as a "statistical regularity" at a press conference in late July 2024.