Chart of the month: Is the US economy about to stall?

The Sahm rule has been triggered by rising unemployment, signaling a potential recession ahead for the world’s largest economy.

The ‘Sahm rule’, coined by US Federal Reserve (Fed) economist Claudia Sahm, has just been triggered. Her ‘rule-of thumb’ warns that if unemployment rises ½% above its 12-month low, a recession could be likely (N.B. based on using three-month averages).

This is similar to ‘stall-speed’ theory when flying planes. It’s based on the premise that if the economy slows by a certain amount, then self-reinforcing dynamics can take place. Greed moves to fear.

For instance, if companies run into trouble, then unemployment could rise. This, in turn, can cause households to struggle to pay their bills, causing further problems for companies. Household and corporate delinquencies rise as a result, causing banks to tighten credit conditions, and so on, and so forth.