Visualized: The Recessionary Signal Coming From the Labor Market

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Visualized: The Recessionary Signal Coming From the Labor Market

August 30, 2024

A weaker-than-expected jobs report in July stoked recessionary fears as it triggered a recession indicator that has correctly identified nearly every recession in the U.S. since 1949.

Created in 2019 by economist Claudia Sahm, the Sahm rule states that when the three-month average of the U.S. unemployment rate increases by 0.5% from its 12-month low, the U.S. is already in a recession. The rule, when properly applied, would have predicted 12 of the past 13 recessions, and even in its one "miss," in 1959, the economy still entered a recession 5 months later.

While the rule has a strong track record, even Claudia Sahm herself has cautioned that the unique labor market dynamics being seen today may mean her rule may not apply. Many economists argue that the current rise in unemployment is due to more workers entering the workforce via migration rather than the increase in layoffs that typically drive unemployment higher.

For a historical context of how the Sahm rule has applied to past recessions, our friends at Visual Capitalist have compiled the infographic below:

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