What is the Sahm Rule recession indicator and why it’s relevant today

The US non-farm payroll data, which will be released today, will indicate if the US economy is entering a recession. In vogue since 2019, the Sahm Rule is a simple calculation that will help you find out the likelihood of a recession in the world’s largest economy. At the end of July, the Sahm Rule showed that the US economy was awfully close to a recession. Did it get worse in August? How will the markets react if it does? We asked some experts.

 
 
 
What is the Sahm Rule recession indicator and why it's relevant today

The Sahm rule, named after economist Claudia Sahm, shows if an economy is entering a recession. It is derived from two sets of data. One, the average unemployment rate for the preceding three months,  and the lowest three-month average in the preceding 12 months.

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If the average unemployment rate for the latest three months is higher by 0.5% or more than the second data point i.e. the lowest three-month average in the preceding 12 months, the economy is said to be entering a recession. Sahm created this rule in 2019. 

If the average unemployment rate for the latest three months is higher by 0.5% or more than the second data point i.e. the lowest three-month average in the preceding 12 months, the economy is said to be entering a recession. Sahm created this rule in 2019.
 

Why is it important today? The US non-farm payroll data expected later today will confirm the strength of the American economy and whether it’s entering a recession.

“We are already at the threshold where you will continue to trigger it (Sahm rule) on and off, at least, if not consistently. But the variability comes in in terms of how markets react to each time it is triggered, because I think the first time shock is over,” Vishnu Varathan, Managing Director Chief Economist, Asia ex-Japan, Mizuho Bank, told CNBC-TV18 on September 5. 

The US Federal Reserve has kept the benchmark repo rate at a 23-year high to tame inflation even at the cost of slowing down the economy. However, no one wants a deep recession.

 

While new job opportunities have slowed down considerably, revised data in August showed that the slump was worse than previously reported. 

While new job opportunities have slowed down considerably, revised data in August showed that the slump was worse than previously reported.
 

The US private payrolls data, released on September 5, showed that the private jobs rose by 99,000 in August, the smallest increase since 2021 and far below estimates, leading to another round of sell-off on Wall Street.

The countrywide non-farm payroll data due to be released today. The median estimate for new jobs in the US added in August 2024 is 165,000, according to a Bloomberg survey.

“A payrolls outcome that comes closer to 100k rather than (the estimated) 175,000-169,000, there is a very good probability if that’s the case, that the Fed goes by 50 basis points in September,” Mitul Kotecha, Head of FX + Head-EM Macro Strategy Asia, Barclays, said in a conversation with CNBC-TV18.

“Now, normally, you would think, if the Fed is going to cut by 50, that would be great news for markets. But the market is worried about growth. The market is worried about a harder landing in the US economy, and what it means for the global economy, global commodities and global assets in general,” he added.

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