Works like a Sahm: Recession indicators and the Sahm rule

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We analyse the use of the Sahm rule as a recession predictor/indicator. We use two approaches: (1) an empirical analysis of historic recession episodes; and (2) stochastic simulations in a VAR framework. We find that in both the Sahm rule is a poor predictor of future recessions. The VAR exercise suggests this is because of its focus on the unemployment rate, which misses non-labour market shocks. This analysis suggests the Sahm rule should be restricted to the purpose that its creator intended.