The recession rule that's flashing amber
Unemployment rise triggers recession rule
Macroeconomic forecasting is littered with flawed empirical heuristics, but the Sahm Rule has earned a near-sacred reputation among monetary economists. Developed by Claudia Sahm, the rule states that a recession is underway whenever the three-month moving average of the national unemployment rate rises by 0.5 percentage points above its twelve-month low. Following the October jobs report, the Sahm metric reached 0.33 percentage points, flashing an unmistakable amber warning.
The Sahm Threshold
Non-farm payroll growth decelerated to 150,000, and the unemployment rate ticked up to 3.9 per cent. Historically, once the unemployment rate begins to rise, momentum becomes self-reinforcing as corporate retrenchment and household caution feed on each other. If the Sahm Rule triggers, it will suggest that the Federal Reserve's hyper-tightening has finally punctured the domestic business cycle.
The Sahm Rule’s amber signal is a stark reminder to monetary policymakers that labour market deteriorations are notoriously non-linear once momentum begins to turn.