It is quicker than traditional methods of identifying recession; it is a relatively simple measure relying on a widely available statistic from the Bureau of Labor Statistics; is does not require any complex econometric analysis. Historically it has a good track record of predicting recession in the US; there is good reason to believe the Sahm Rule will be quite robust as there is a very strong and obvious link between recession and a rise in unemployment. In a paper ( I Z A Institute of Labor Economics No. 13167, April 2020), Feng and Sun suggest that the Sahm rule can be improved by taking into account misclassification errors of measuring unemployment at the start of a recession.

It can take economists up to 12 months to actually state that the economy is in recession; if you can have early warnings signs of a recession as per Sahm rule, you can start pursuing expansionary and fiscal policy early rather than later. One suggestion of economist Claudia Sahm is that a rise in the Sahm Rule recession indicator could be automatically linked to fiscal policy so, at early signs of recession, automatic benefits are paid, to provide a fiscal stimulus rather than relying on governments to react, which usually takes much more time.

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PS:

There are many economic rules which were true for past historical data, but then proved to be less reliable for the future:

• Taylor rule on setting interest rates – became ineffective in a period of zero interest rates
• Phillips Curve – showed trade off between nominal wage growth and unemployment, but then became less reliable in 1970s and 80s.
• Friedman’s Rule for growth of the money supply – lost relevance in the 1980s.

Conclusion: It is a matter of economic macro-prudence to apply such rules and to assess the real-time conditions of the political economy, with respect to decision-making and closing information gaps, mainly due to ideological factors and related political biases.

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There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Lv Mises. Human Action (1949), Chapter XX: Interest, Credit Expansion, The Trade Cycle, § 8 : The Monetary or Circulation Theory of the Trade Cycle

The clearest signal on stagnant height Steady individual jobs

Unemployment rate It means that they resort to their savings. Investors' reluctance to invest

The economic recession occurs when in 2 subsequent quarters there is a negative growth of the Gross Domestic Product (GDP), despite the various macroeconomic policies adopted by the Government to accelerate the economy.

https://smartasset.com/investing/recession-definition#:~:text=If%20the%20yield%20curve%20is,a%20decline%20in%20manufacturing%20jobs.

Hello Chuck:

Recession the definition is the same for The National Bureau of Economic Research "Gross domestic product in the U.S. fell 0.9% in the second quarter of 2022, marking the second consecutive quarter of negative growth, the commonly accepted definition of a recession".

However, is The National Bureau of Economic Research that officially declares a recession; it has not done so and is unlikely to do.

Interesting rule, which I was not aware of. However, it seems plausible and is probably akin to yield curve rules or Okun rules. I'll take a closer look, thanks.

Indeed, "Okun's law looks at the statistical relationship between a country's unemployment and economic growth rates. Okun's law says that a country's gross domestic product (GDP) must grow at about a 4% rate for one year to achieve a 1% reduction in the rate of unemployment".

However, in recent years economic growth has not had significant effects in reducing unemployment. In Mexico, jobs have increased in the informal sector of the economy for a long time.

Predicting a recession is a complex task that involves analyzing various economic indicators and factors. Here are some key factors and methods to consider when trying to predict a recession:

Yield curve inversion

Leading economic indicators

Employment data

Consumer spending and confidence

Business cycle analysis

there are many indicators to predict a Recession as: negative Gross Domestic Product, hgh inflation, low spending, interest rate increases.