Quick update on the Sahm rule
The unemployment rate increased to 3.9% in October; job gains slowed to 150,000--a sign that the recent burst in economic activity and jobs was likely unsustainable. But that's not a recession.
With the rise in the unemployment rate, I have gotten questions about the recession indicator named after me, Sahm rule. Today’s post shares a few brief thoughts.
The Sahm rule did not trigger in October 2023. The current value is 0.33 percentage point, which remains below the 0.50 percentage point trigger.
The Sahm rule is: when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to its low during the previous 12 months, we are in a recession.
Currently, a three-month moving average of the unemployment rate of 4% would trigger the rule. One month at 4% does not cut it.
The Sahm rule would have triggered early in every recession since 1970 and not outside or before recessions. It is an indicator, not a forecast. But clearly, rising unemployment is not a good sign. You don’t need a rule for that.
There are times when a 0.33 percentage point (or larger) increase occurred outside of a recession. Nothing today suggests a recession is inevitable.
The Sahm rule triggers within the early months of a recession, so technically, we could be in a recession, and the rule is catching up. Looking at the totality of data in the past few months, it would be surprising if we were already in a recession.
The Sahm rule is an empirical reality, not a law of nature. It can break in that it triggers, and there is no recession. Up until last year in the US, two consecutive declines in GDP only had occurred within recessions. Not anymore.
Rules are made to be broken
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The Sahm Rule is a historical pattern, not a law of nature. The past few years are unlike anything in living memory. Celebrate the wins, prepare for the worst, and fight like hell to get us to the other side of the pandemic and defend democracy. Don’t bet on the rules.
I developed the Sahm rule as part of my policy proposal to send out stimulus checks automatically to families as soon as a recession starts, not forecast recessions. I have gotten many questions about a recession during the past two years. No one has asked me what we do if one arrives and inflation remains high. (I wrote about it anyway.)
The Sahm rule: I created a monster
The Sahm rule is simple: 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. Get relief to families fast in recessions.
Get money to people in recessions, high inflation or not
The global economy is headed toward a recession next year. Even if the United States largely weathers the storm, millions of workers would lose their jobs, and for even more workers, the opportunities from a strong labor market will disappear. A mild recession is still a recession, and with it comes hardship.
In closing.
The unemployment rate rising to 3.9% in October is not good news. But the fact that it has been below 4% for almost two years is very good. Let’s not forget that.
Setting the Sahm rule aside, let me be clear: every worker who can't find a job matters. And it's getting harder for some, albeit relative to an unusually good place. The Fed was wise to hold off this week. We have a lot to lose if this recovery goes off the rails.
The fact that interest payments go to net savers is reason to think again about the usefulness of those payments as an economic buffer. The fact that they haven’t worked for the money is a supply-side issue. The fact that they won't spend it is a demand-side issue. S=I isn't all that reliable as a business cycle predictor.
It's going to take a lot more than a so called "soft" jobs number of 150k to trigger this recession so many are clamoring for. Some people need to get over themselves, this was not a terrible jobs report yesterday. I also wouldn't be in any rush to credit Jerome Powell for the moderation in job growth or even wages which have slowed to some extent as well.