Statistics Canada’s most
recent GDP growth rate data shows that the second quarter of 2025 exhibited
negative GDP growth. As noted, “After recording declines in April and May,
real gross domestic product (GDP) edged down 0.1% in June, driven by declines
in goods-producing industries in all three months.” This of course has sparked talk of recession
yet again especially given that the unemployment rate is also on its way
up. Of course, there is always some
debate over when a recession is underway and what the definition of a recession should be.
The traditional definition of a recession is two consecutive
quarters of real GDP growth. If the third quarter of 2025 is also
negative, then by the traditional definition we will be in recession. The main
drawback of this measure is that GDP numbers come out with a lag so that
by the time the recession is declared it will have been underway for some
time. An alternate real time indicator of recessions has been devised by
U.S. economist Claudia
Sahm and known as the Sahm Indicator. It was constructed with reference to
the U.S. economy and uses the monthly unemployment rate but can be applied to
any country’s national level unemployment rate data.
The Sahm
Rule Recession Indicator "signals the start of a recession
when the three-month moving average of the national
unemployment rate (U3) rises by 0.50 percentage points or more relative to
the minimum of the three-month averages from the previous 12 months."
If one takes monthly seasonally adjusted unemployment rate data for the
population aged 15 years and over data for Canada (Source: FRED
LRUNTTTTCAM1565) and calculates the three month moving average unemployment rate and the minimum unemployment rate of the previous 12 months and then calculates the indicator (blue line on the
figure), by these calculation Canada appears to have moved into recession
territory in October of 2024 as the indicator moved above the 0.5 line (red
line on figure) that month and has been above since.
As the figure shows, since the late 1950s, the indicator has
tracked previous Canadian recessions and slowdowns such as those the 1970s,
1980s, 1990s and the Great Recession of 2008-09 well.
