While it is understood that policymakers consider the totality of the impact of several indicators to determine whether an economy is in a recession, one core indicator, known as the Sahm Recession Indicator, is often used as a signal for the start of a recession.
Regarding the Sahm Recession Indicator, the St Louis Fed explained:
"This signals the start of a recession when the three-month moving average of the national unemployment rate (U3) (https://fred.stlouisfed.org/series/UNRATE) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.
This indicator is based on "real-time" data, that is, the unemployment rate (and the recent history of unemployment rates) that were available in a given month."
Looking at the #unemployment data for the first months of 2024, the US Bureau of Labor Statistics reported unemployment at 3.7% in May, 3.9% in February, 3.8% in March, 3.9% in April and 4% in May. These figures are not far off from data reported since 2022 and are shown in the below table.
Regarding the Sahm Recession Indicator, which may signal a #recession , the graph below from the St Louis Fed shows that it was 0.20 for January, 0.27 for February, 0.30 for March, 0.37 for April, and 0.37 for May 2024. (Note here that it is important to look at national rates rather than state by state.)
In addition, currentmarketvaluation.com published the below graph showing the proximity of this indicator to the threshold for a recession.
Concerning this, currentmarketvaluation.com explained that the above-dotted lines indicate the 50bps threshold signalling imminent recession has not yet been reached.
Reliability of the rule and takeaways
In terms of the reliability of the Sahm Recession Indicator, currentmarketvaluation.com said:
"In the 11 recessions since 1950, the Sahm rule has triggered during every single one, on average about 3-months into the recession. This is well before NBER officially declares a recession, and before GDP data is available to make it clear. Since 1950 the Sahm rule has indicated only one false positive (in 1959), and even then, six months later the US had entered a recession."
Looking at the Sahm Recession Indicator for this year, it is clear that the number increased from January to May 2024. However, the latest indicator does not reflect that the US economy is in a recession.
Notwithstanding the usefulness of the Sahm Recession Indicator, it is important to reiterate that policymakers may use the totality of several other indicators to make conclusions about the start of a recession or the existence of #inflation.
For example, for inflation, policymakers may consider changes in the consumer price index and the producer price index (for current updates on these indices, see https://www.bls.gov/).
Ultimately, once policymakers have analysed the totality of all relevant indicators, they make a statement on the current economic condition and implement policies accordingly. Such policymakers include the #FederalReserve , which is expected to keep interest rates as is at their meeting this month (June 2024).