Sahm rule
method of determining when the economy has entered a recession
In macroeconomics, the Sahm rule, or Sahm rule recession indicator, is a heuristic measure by the United States' Federal Reserve for determining when an economy has entered a recession. It is useful in real-time evaluation of the business cycle and relies on monthly unemployment data from the Bureau of Labor Statistics (BLS). It is named after economist Claudia Sahm, formerly of the Federal Reserve and Council of Economic Advisors.
The Sahm rule states:
When the three-month moving average of the national unemployment rate is 0.5 percentage point or more above its low over the prior twelve months, we are in the early months of recession.
Origin
The Sahm rule originates from a chapter in the Brookings Institution's report on the use of fiscal policy to stabilize the economy during recessions. The chapter, written by Claudia Sahm, proposes fiscal policy to automatically send stabilizing payments to citizens to boost economic well-being. By automating this process she saw the opportunity to get aid to people faster. Because the sooner the help was distributed in her view the better the odds that small business can stay open and that people could stay in their homes and keep their jobs. Her rule should thereby function as an early warning to detect the early stages of a recession and then to step in and help manage the recession on autopilot with direct payments to individuals when conditions get bad.
Instead of relying on human intuition to determine when such payments should be sent, Sahm outlines a method-based case to trigger the payments.
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