This rule has been working for 50 years. Recession is inevitable, fortunately the crisis can pass by
The US unemployment rate rose to 4.3% in July from 4.1%, but fell in August. That’s good, because a rise in the number of people out of work heralds a recession in the United States. The so-called Sahm rule is taken very seriously by economists. What exactly does it cover?
Until recently, the investment bank Goldman Sachs had forecasted a 25 percent chance of a recession in the United States in the next 12 months. It has now lowered its forecasts slightly to 20 percent. This is not the first time the forecast has changed: in the first half of August, the bank’s experts raised the probability from 15 to 25 percent after the unemployment rate rose to a three-year high in July, raising concerns about a slowdown. It is encouraging that this time the change is downward.
Recession in the USA
“We have now reduced our probability from 25% to 20%, mainly because the data for July and early August released since August 2 do not show signs of a recession,” said Jan Hatzius, chief US economist at Goldman Sachs.
The jobless claims report released Thursday showed the number of Americans seeking unemployment benefits fell to a one-month low last week, while separate data revealed retail sales rose by the most in a year and a half in July.
Sahm’s rule doesn’t lie
Why is the unemployment rate so important? Because it has preceded every American recession for 50 years. This has been described and confirmed by dozens of analyses, and is scientifically confirmed by the so-called Sahm rule – named after economist Claudia Sahm, who developed it in 2019. It says that if the three-month moving average of the unemployment rate has increased by at least half a percentage point from the minimum of the previous 12 months, then we are most likely dealing with a recession. The economist has analyzed the situation in the American economy since the 1970s and has irrefutable evidence that such a change in the unemployment rate is a harbinger of a recession in the US.
In half a century, the rule has never sent a false alarm. Whenever the average unemployment rate over a three-month period was at least 0.5 percentage points above the previous year’s low, a committee of the U.S. National Bureau of Economic Research declared a recession.
The Federal Open Market Committee (FOMC), the decision-making body of the Federal Reserve, is expected to cut interest rates at its next meeting, scheduled for September. This would be the first rate cut since March 2020. Such a move has been widely anticipated in the financial market for a long time, but until now the prevailing opinions were that it would be cautious, by 0.25 percentage points. Now, expectations are growing for a more decisive move.
