The Sahm Rule, designed to signal the start of a recessionwas officially activated in the United States last week, when the domino effect began. It turns out that The three-month moving average of the unemployment rate is now 0.5% above the minimum of the last 12 months and that is a warning sign that, since 1970, seems to be infallible. That is what the index measures, which bears the name of its creator.
Claudia Sahm, who designed the rule, had said the Fed should have cut rates on Wednesday at the end of its last meeting. He also He told the Wall Street Journal that he does not believe the economy is on the immediate brink of a recession, but that the situation is getting worse. In this context, the Bank of America provided a historical table of the times it was activated in the past.
On this occasion, one thing to keep in mind is that, Unemployment is rising from a historically low level. In fact, only now, with the July reading, is the rate above what the Federal Reserve (Fed) considers to be the long-term estimate, which is 4.2%.
What is Sahm’s Rule
As explained to Scope, Leo Anzolonedirector of the Center for Political and Economic Studies (CEPEC), the Sahm rule is a tool that helps identify economic recessions. It is based on a simple indicator“If the unemployment rate rises by 0.5 percentage points or more over a three-month period, it suggests the economy may be entering a recession.”
And he adds that this rule is used to “provide early signals of an economic slowdown and help in making decisions.” This is how global stock markets went into panic mode since last week, when the weak US employment report triggered “Sahm’s Rule”“, he reliable indicator that the economy has entered a recession.
As stated, the indicator is named after its creator, Claudia Sahma former Federal Reserve and White House economist. And as Anzalone explained, it is the rule that indicates that a recession has begun when the three-month moving average of the unemployment rate in the US is 0.5 percentage points or more above its minimum during the previous 12 months.
That threshold was crossed when US government data showed that the unemployment rate had reached 4.3%, its highest level since October 2021.
The Sahm Rule reading hit 0.53 points in July, according to the Federal Reserve Bank of St. Louis. Florian Ielpo, head of macroeconomic research at the investment manager Lombard Odiertold the American press that the rule was an indicator “purely empirical” without “theoretical basis“But the markets have clearly concluded that there will be a recession,” he added.
Investors are concerned that the Fed has waited too long to cut interest rateswhich are at their highest level in 23 years, values to which they were brought to stop runaway inflation. Despite the data, even Sahm herself doubted that the US economy was contracting.
“I’m not worried that we’re in a recession right now.“Nobody should be in panic mode today, although it looks like some might be,” he added, noting that key measures of the economy “still look really good.”
Sahm highlighted rising household incomes along with resilient consumer spending and business investment. “This time it could really be different,” he said.
Source: Ambito
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