With the U.S. economy at a delicate juncture, a nuanced look at different economic indicators suggests a more complex picture than the broad national data might reveal. According to recent research by UBS, approximately 42% of U.S. states are currently activating the criteria of the Sahm rule. Named after economist Claudia Sahm, the rule posits that a rapid rise in the unemployment rate signals the start of a recession.

Despite the national unemployment rate’s three-month moving average being only 0.27 percentage points above the yearlong low, the Sahm rule isn’t broadly signaling a downturn, because it depends on these specific moving averages. But a granular assessment on a state-by-state basis, factoring in the size of each state’s labor force, paints a different picture. This localized approach reveals that a significant portion of states are indeed activating the Sahm rule, reaching a 0.1 percentage point increase from the previous month.

Historically, such a high proportion of states meeting the Sahm rule’s conditions has only been seen around periods leading up to, during, or after recessions. This correlation underscores the importance of state-level economic data, which can sometimes diverge from the national trends.

Therefore, while national unemployment figures may appear benign, the state-level data warrants a closer examination. The marked uptick in states meeting the Sahm rule’s recessionary conditions suggests that the U.S. may be closer to an economic downturn than the national average alone would indicate. Policymakers and investors are thus advised to keep a watchful eye on state-specific employment trends to better assess the recession risk and to be prepared for potential policy actions.