The Sahm Rule is a recession indicator that was developed by economist Claudia Sahm. It is based on the idea that changes in the unemployment rate can be used to identify the onset of a recession. The rule states that if the three-month moving average of the unemployment rate increases by 0.5 percentage points or more above its low for the previous year, it is considered a recession signal. The indicator is considered simple and quick to use, and has shown to be a reliable indicator of recessions in the past.
Recessions are usually determined retrospectively. In other words, it is only after a period of economic decline that it can be determined that a recession has occurred. The National Bureau of Economic Research (NBER) is the organization that officially declares when a recession has begun and ended in the United States. Indicators like the Smoothed U.S. Recession Probability and the Sahm Rule could give a headstart in the speculation that a recession has already started while not officially declared.
For example, the Great Recession of 2007-2009 was officially declared by the National Bureau of Economic Research (NBER) to have begun in December 2007. It was not until over a year later, in December 2008, that the NBER officially announced that the U.S. was in a recession. Meanwhile, the Sahm Rule signalled a recession in February of 2008.
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Disclaimer: The information presented within this video is NOT financial advice.