What the Sahm rule means for us Oil & Gas people.

The Gist: The Sahm rule is one of the best recession indicators out there. If the unemployment rate (U3) merely stays flat at 3.9%, the SAHM rule would trigger another recession by Dec-2023 which would impact real wage growth and thus oil demand. If such is the case, look for flows to make their way back to the integrated oils.

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The Sahm Rule, named after former Federal Reserve economist Claudia Sahm, has been a reliable indicator for timing the onset of a recession.

To calculate it one takes the 3-month moving average of the unemployment rate (U3) and compares it to the lowest unemployment rate over the last 12 months.

When the figure breaches 50 bps (0.50%) a recession has typically begun.

The rule has only exhibited one false positive (Nov-1959) and has captured every recession for which monthly data is available.

Currently, according to my calculations, the figure sits at 43 bps.

Please note the above chart uses revised U3 unemployment data so it looks different than the Real Time Sahm Rule cited by many economists (HERE) which uses non-adjusted figures or “real-time” data.

What’s more interesting is that if the unemployment rate merely stays flat at 3.9% through December, the 50 bps trigger will be hit when compared to the April 2023 low of 3.4%.

It is no coincidence that when the Sahm rule is breached, real wage growth begins to turn down as shown below.

Why does this matter for oil & gas people such as us?

Because, as shown below, U.S. oil demand DOES NOT grow when real wages dip below 2%.