Why My Recession Rule Could Go Wrong This Time
The highly accurate Sahm rule uses the unemployment rate to detect the start of an economic downturn. But like many indicators during the pandemic era, it’s possible it could “break.”
Are we on the cusp of a recession or not?
Photographer: Joe Raedle/Getty Images
Alarm bells sounded Friday when we learned that the US unemployment rate rose to 3.9% for October, well above the 50-year low of 3.4% that it hit earlier in the year. The latest reading is still very low, so what’s with the doomsayers telling us a recession has arrived?
Relatively small increases in the unemployment rate, even starting from low levels, typically signal a recession. Where we are now is insufficient to make that call, but it’s worrisome. How do I know? Before the pandemic, I developed a highly accurate recession indicator, later named the Sahm rule. It would have triggered early in every recession since 1970. But it has not triggered now.