‘Sahm Rule’ Enters Fed Lexicon as Fast, Real-Time Recession Flag

BOSTON (Reuters) – Astronomers get to name comets and biologists get to name species, but come up with something cool in economics and you might be memorialized with a law or a rule or a “curve.”

Introducing the latest: the Sahm Rule, whose architect, Federal Reserve economist and consumer section chief Claudia Sahm, came up with it to flag the onset of recession more quickly than the current process that formally dates business cycles. It also aims to be more dependable than some of the financial market metrics known to throw off false signals.

In a paper released earlier this year, she said the unemployment rate can cut through all that. It is a widely used and easily understood statistic that captures why recessions matter. It also turns out that when the three-month average unemployment rate rises half a percentage point above the low of the previous year, the economy has just or is about to enter a period of contraction.

It has happened every time since the 1970s, Sahm noted in recommending her rule be used as a way to automatically trigger stimulus payments to households to help offset the sting of rising joblessness and potentially shorten the recession without waiting for politicians to sort through the data and vote on a stimulus package.



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