At the Money: Forecasting Recessions with Claudia Sahm

Identifying a Recession

A recession is a broad-based contraction in economic activity that affects all industries and regions. The duration and severity of recessions vary depending on the underlying causes. For example, the global financial crisis in 2008 led to a significant and rapid recession, while the bursting of the dot-com bubble in 2001 resulted in a milder downturn. Claudia Somme, a former Federal Reserve economist, developed the Somme Rule, which uses the unemployment rate as an indicator of a recession. If the three-month average unemployment rate rises by half a percentage point or more compared to the lowest average in the previous 12 months, it signals a recession. The Somme Rule has had a perfect track record of predicting recessions early, often before official recession dating by the National Bureau of Economic Research.