The Sahm Rule indicates the early stages of a potential recession by focusing on the unemployment rate. It can be calculated in three steps:
1. Compute the average unemployment rate over the last three months.
2. Next, find the lowest three-month average of the unemployment rate over the past 12 months.
3. Compare the numbers. If the latest three-month average of the unemployment rate is at least 0.50% higher than its lowest point in the past year, the Sahm Rule states that the economy is likely entering a recession.
Letâs say that in January, February, and March, the unemployment rates were 4.0%, 4.1%, and 4.2%, respectively. Using that data, letâs calculate the latest three-month moving average of the unemployment rate:
Latest three-month moving average = (4.0% + 4.1% + 4.2%) / 3 â= 12.3% / 3 â= 4.1%
Suppose over the past year, the lowest three-month average of the unemployment rate was 3.5%. Now, letâs compare the numbers:
Latest three-month average: 4.1%
Lowest three-month average in the past year: 3.5%
Difference: 0.6%
Since 0.6% is more than the 0.5% threshold, the Sahm Rule would suggest that the economy might be entering a recession.
The Sahm Rule is known for its simplicity and reliability. Historically, it has accurately predicted recessions without giving false alarmsâ.
In August 2024, the Sahm Rule was triggered as the unemployment rates rose. However, the ruleâs creator, Claudia Sahm, was not convinced that the economy entered a recession. If Claudia stands correct in the following months, this will be the first time the rule failed to predict a recession accurately.
The Sahm Rule is a tool that indicates the early stages of a potential recession by looking at changes in the unemployment rate. It provides early warnings so people can quickly respond to economic downturns. While commonly used in traditional markets, the concept behind the Sahm Rule could also be adapted to the crypto markets, by looking at key indicators specific to it.Â