Magazine article Economic Trends

Yield Curve and Predicted GDP Growth: September 2010

Magazine article Economic Trends

Yield Curve and Predicted GDP Growth: September 2010

Article excerpt

Covering August 26, 2010--September 17, 2010

Overview of the Latest Yield Curve Figures

Long rates took a turn higher over the past month, adding a bit of steepness to the yield curve, as short rates stayed level. The three-month Treasury bill rate edged down to 0.15 percent from August's (and July's) 0.16 percent. The ten-year rate rose to 2.74 percent, up from August's 2.61 percent, but still down from July's 2.97. The slope rose 10 basis points to 255, up from August's 245, down from July's 281.

Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.0 percent rate over the next year, the same numbers as August and just down from July's 1.14 percent. Although the time horizons do not match exactly, this comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year.

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The NBER has declared an end to the recession, putting the trough at June 2009. Having this data has materially changed the recession probabilities coming from the model. Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next September stands at 2.9 percent, well below the August number of 18.5 percent, though the numbers are not strictly comparable. The change reflects the addition of another year of nonrecession data (as declared by the NBER), rather than any massive improvement in the economy.

The Yield Curve as a Predictor of Economic Growth

The slope of the yield curve--the difference between the yields on short- and long-term maturity bonds--has achieved some notoriety as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve (short rates above long rates) indicates a recession in about a year, and yield curve inversions have preceded each of the last seven recessions (as defined by the NBER). One of the recessions predicted by the yield curve was the most recent one. The yield curve inverted in August 2006, a bit more than a year before the current recession started in December 2007. …

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