Here’s why triggering the Sahm Rule recession indicator is so dangerous

A sustained rise in unemployment over the past year has triggered the Sahm Rule recession indicator. Now, its creator has provided more context behind this dangerous metric and why Americans shouldn’t ignore it.

The Sahm Rule observes the start of a recession when the unemployment rate’s three-month moving average rises by at least 0.5% from its 12-month low. The Sahm Rule was officially triggered in July after the national unemployment rate spiked to 4.3% from 4.1% the previous month.

Former Federal Reserve economist Claudia Sahm developed this indicator as part of a policy proposal in early 2019. In a recent op-ed published by Bloomberg, she explained why the metric is a powerful indicator of recessions.

“The Sahm Rule relies on a powerful feedback loop: Relatively small increases in the unemployment rate can turn into large ones. Workers without paychecks weigh on consumer demand, leading to more workers without paychecks,” Sahm wrote.

“A rising unemployment rate also affects more than just the unemployed, since it normally coincides with fewer raises and job opportunities, as well as heightened uncertainty overall,” she explained.

In other words, looking at the unemployment rate as a static metric isn’t a reliable way to gauge the health of the economy. Rather, it’s the magnitude of change in unemployment that should be observed carefully.

While the unemployment rate seems low by historical standards, it has risen by almost one full percentage point since early 2023.

Ironically, Sahm doesn’t think the U.S. is currently in a recession, despite what her famed metric says. Even more ironic is the fact that the Sahm Rule was triggered in every major recession going back to 1970, according to JPMorgan.

Sahm believes this time is different. Other economists aren’t so sure it is.

An “iron-clad indicator”

Because the Sahm Rule was observed in every major recession going back five decades, it has become an “iron-clad indicator” that an economic downturn has either arrived or is about to very soon, according to economist David Rosenberg.

Macro analyst Sven Henrich said denying the possibility of a recession with the Sahm Rule flashing red is “curious,” to say the least, given that its recent rise has never been observed during periods when the economy was strong.

“I know everyone from the Fed on down keeps pushing the soft landing/no recession narrative still, but isn’t it curious that the real-time Sahm rule recession indicator keeps trending higher, seemingly incompatible with prior nonrecession readings?” he wrote.

Other economists say the Sahm Rule is one piece of a much larger puzzle pointing to a troubled economy.

According to Queens’ College president Mohamed El-Erian, the economy has seen “nothing but negative surprises” in recent months, referring to dismal results for manufacturing production, services activity, and consumer spending. He believes the U.S. economy is slowing much faster than most expect.

According to the New York Fed’s analysis of Treasury spreads, the odds of a recession happening in the next 12 months are much higher than most economists expect. The New York Fed’s tracker currently shows a 56.2% chance of a recession by July 2025.