Understanding the Sahm Rule

The Sahm Rule is an economic indicator that signals the start of a U.S. recession. It triggers when the three-month moving average of the unemployment rate rises by 0.50 percentage points or more above its lowest point from the previous 12 months.

Core Formula

Rule Trigger = (Current 3-Month Avg. Unemployment Rate) - (12-Month Low Point) ≥ 0.50%

Step-by-Step Calculation Method

Step 1: Gather Monthly Unemployment Data The calculation uses the seasonally adjusted monthly U-3 unemployment rate published by the U.S. Bureau of Labor Statistics (BLS).

Step 2: Calculate the Three-Month Moving Average For any given month, calculate the average unemployment rate for that month and the two preceding months. This smooths out single-month volatility.

For example, the average for April = (Rate for Feb + Rate for Mar + Rate for Apr) / 3.

Step 3: Identify the Lowest Moving Average from the Past 12 Months Look back at the moving averages calculated for the previous 12 months (including the current month). Find the lowest value in that period.

Step 4: Calculate the Increase from the Low Point Subtract the 12-month low point (from Step 3) from the current month's three-month moving average (from Step 2).

Step 5: Apply the Trigger Threshold If the calculated increase is 0.50 percentage points or greater, the Sahm Rule is triggered, indicating the economy is likely at the beginning of a recession.

Key Context: This rule was created by economist Claudia Sahm primarily as a potential real-time trigger for automatic fiscal stimulus policies (like direct payments) when a recession begins, not just as an academic observation.

Illustrative Example: A Hypothetical Trigger

Month	Unemployment Rate (%)	3-Month Moving Avg. (%)	12-Month Low (%)	Increase from Low	Sahm Rule Trigger?
Jan	3.8	3.73	3.73	0.00	No
Feb	3.9	3.80	3.73	0.07	No
Mar	4.1	3.93	3.73	0.20	No
Apr	4.3	4.10	3.73	0.37	No
May	4.5	4.30	3.73	0.57	YES (≥ 0.50)

In this example, by May, the three-month average (4.30%) has risen 0.57 percentage points above the 12-month low established in January (3.73%). This crosses the 0.50% threshold and would trigger the Sahm Rule signal.

Important Considerations for Interpretation

While historically reliable, the rule should not be used in isolation. A notable discussion emerged in 2024 when the rule triggered, but many economists, including Claudia Sahm, argued a broad recession had not begun. They cited strong job growth and consumer spending, suggesting an increase in labor supply (from higher participation and immigration) might have raised the unemployment rate without indicating a severe economic contraction. Therefore, the Sahm Rule is best used as one strong signal within a broader analysis of economic data.