Sahm Rule Recession Indicator

Category: Other Finance
- March 25, 2025
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The Sahm Rule Recession Indicator signals the start of a recession when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to its minimum during the previous 12 months.

Unemployment Rate Data Input

Enter Monthly Unemployment Rate Data (Last 15 Months)
Month Year Unemployment Rate (%)
Analysis Options
percentage points
months
months

About the Sahm Rule

The Sahm Rule, developed by economist Claudia Sahm, provides a reliable real-time recession indicator based on changes in the unemployment rate. It triggers when the three-month average unemployment rate rises 0.5 percentage points or more above its low during the previous 12 months.

How It Works

The Sahm Rule compares current unemployment conditions to recent lows:

  1. Find the lowest 3-month average unemployment rate over the past 12 months
  2. Calculate the current 3-month average unemployment rate
  3. Measure the difference between these two values
  4. If the difference exceeds 0.5 percentage points, a recession signal is triggered
Historical Performance

The Sahm Rule has successfully signaled the onset of recessions since the 1970s:

  • It provides early warning signals at the start of recessions
  • It minimizes false positives compared to other indicators
  • It uses readily available unemployment data that is rarely revised substantially
Applications

The Sahm Rule has several practical applications:

  • Economic Policy: Helps policymakers identify recessions quickly to implement countercyclical measures
  • Investment Strategy: Provides signals for defensive portfolio adjustments
  • Business Planning: Offers early warning for businesses to prepare for economic downturns
  • Research: Serves as a benchmark for comparing other recession indicators
Sahm Rule Formula:
\[ \text{Sahm Indicator} = \text{Current 3-Month Average Unemployment Rate} - \text{Minimum 3-Month Average in Past 12 Months} \] A recession signal is triggered when the Sahm Indicator ≥ 0.5 percentage points.

What Is the Sahm Rule Recession Indicator?

The Sahm Rule Recession Indicator is a simple and reliable way to detect the start of a recession in real-time. It focuses on shifts in the unemployment rate to signal downturns early. Specifically, it measures whether the current three-month average unemployment rate has risen by at least 0.5 percentage points compared to its lowest point over the previous year.

This method was developed by economist Claudia Sahm and is widely recognized for its accuracy and clarity. It's especially useful because it uses data that’s readily available and rarely subject to large revisions.

How to Use the Calculator

This tool makes it easy to determine whether current unemployment trends may indicate a recession. Here's how to use it:

  • Input Unemployment Data: You can enter monthly unemployment rates manually for the past 15 months, or upload a CSV file with this data.
  • Customize Settings: Adjust the threshold value (default is 0.5), lookback period, and moving average duration to fine-tune the analysis.
  • Run the Calculation: Click the “Calculate Indicator” button to see results including the indicator value, recession signal, charts, and a full explanation of the steps involved.
  • Review the Visualization: View detailed charts of unemployment trends and the Sahm indicator over time.

You can also reset everything using the “Reset” button to begin a fresh analysis. The tool supports dynamic interaction and updates as you make changes to the inputs.

Why This Tool Is Useful

The Sahm Rule calculator provides a practical way to understand economic conditions and detect warning signs early. It can be useful in a range of scenarios:

  • Personal Finance: If you’re evaluating job market stability, planning retirement, or budgeting future income, recession signals can influence decisions like using a Systematic Withdrawal Plan tool or estimating monthly loan payments.
  • Business Strategy: Companies can adjust hiring, production, or investment strategies based on signals from this indicator, just like they would use a profit margin breakdown or sales tax rates to guide pricing.
  • Investment Decisions: Understanding potential downturns can help investors adjust portfolios. Similar to using a commission estimator or margin analysis guide, this tool supports data-backed decision-making.
  • Policy and Research: Economists and researchers can include this as part of broader analyses, much like tracking historical inflation trends or consumer price trends with a CPI inflation tool.

FAQs

What data do I need to use the calculator?

You need monthly unemployment rate data for the most recent 15 months. This can be entered manually or uploaded using a CSV file.

What does it mean when the Sahm Rule triggers a recession signal?

A recession signal means the average unemployment rate has risen significantly compared to its recent low. Specifically, if the increase is 0.5 percentage points or more, it may indicate that a recession has begun.

Can I adjust the threshold or time period?

Yes. You can change the threshold (default is 0.5), the lookback period (typically 12 months), and the length of the moving average (usually 3 months).

What if my data has gaps or errors?

The calculator checks your entries for completeness and alerts you if anything is missing. Make sure each row includes a valid month, year, and unemployment rate.

How accurate is the Sahm Rule?

Historically, the Sahm Rule has provided timely and accurate signals for every U.S. recession since the 1970s, without many false positives.

Final Thoughts

Whether you're analyzing the economy, making financial plans, or exploring tools like a retirement withdrawal planner or loan affordability check, the Sahm Rule calculator offers a straightforward and insightful way to interpret unemployment data. It’s one more helpful resource in your toolbox—just like a tip percentage guide, VAT breakdown tool, or salary breakdown tool—to make sense of key financial indicators.