Rising Unemployment Rates Signal a Possible US Recession: Understanding the Sahm Rule and Preparing for the Future

Cease Utilizing the Sahm Rule Recession Indicator for States

Despite a brief period of calm at the beginning of 2024, the United States is once again on a “recession warning”. The concerns this time are not related to the usual indicators such as an inverted Treasury market yield curve or low consumer and business sentiment. Instead, some economists are pointing to the rising unemployment rates in several states as a sign that a recession may be looming or already underway.

The Sahm rule, developed by an economist, is a simple recession indicator that has been used to determine if the economy is in a recession. According to this rule, if the three-month average of the unemployment rate is half a percentage point or more above its low in the previous 12 months, then the economy is in a recession. When applied to individual states, 20 of them should be in a recession based on this rule. These states account for over 40% of the US labor force, including California which alone makes up 11% of it.

The rise in unemployment rates in several states has led some economists to believe that a recession may be imminent if not already underway. It is crucial for individuals and businesses to closely monitor these indicators moving forward to better understand the true state of the economy and prepare for any potential challenges ahead.

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