What Is the Sahm Rule and Why Is It Important?

Estimated reading time: 3 minutes

Recession-Bound?

Economists rely on many metrics to measure the health of the economy — and one is currently suggesting its health may be faltering.

The so-called Sahm Rule signaled the U.S. may be in the early stages of a recession, spooking some investors and contributing to the recent sell-off in the stock market.

What Is the Sahm Rule?

The Sahm Rule, named after former Federal Reserve economist Claudia Sahm, identifies the initial phase of a recession as the point when the unemployment rate’s three-month moving average rises at least half a percentage point from its 12-month low.

The indicator was officially triggered following last month’s jobs report, which showed the economy added far fewer jobs than expected in July, while the unemployment rate rose from 4.1% to 4.3%.

However, Claudia Sahm herself clarified to CNBC that this red flag just means the economy is at risk of a recession, and not necessarily in one.

Eyes on the Fed

The Federal Reserve’s high interest rate policy was intended to cool the economy enough to get the high inflation of the past years under control. Inflation did indeed come down, but now worries are growing that it may have overshot the target, cooling the economy too much.

The Fed is widely expected to cut interest rates for the first time in this cycle in September.

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