Magazine article Economic Trends

Yield Curve and Predicted GDP Growth: November 2010

Magazine article Economic Trends

Yield Curve and Predicted GDP Growth: November 2010

Article excerpt

Covering November 19, 2010-December 10, 2010

Highlights

                                      December  November  October

3-month Treasury bill rate (percent)    0.14      0.14      0.14

10-year Treasury bond rate (percent)    3.18      2.89      2.05

Yield curve slope (basis points)        304       275       236

Prediction for GDP growth (percent)     1.0       1.0       1.0

Probabilty of recession in 1 year       1.5       2.3       3.9
(percent)

Overview of the Latest Yield Curve Figures

Continuing a recent trend, the yield curve moved sharply steeper over the past month, as long rates increased nearly three-tenths of one percent, and short rates held steady. The three-month Treasury bill rate stayed at 0.14 percent, where it has been since October. The ten-year rate rose to 3.18, up from November's 2.89 percent, which itself was well above Octobers 2.50 percent. The slope rose a hefty 29 basis points (bp) to end above 300 bp for the first time in a while, a full 68 bp above October's 236 bp.

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 projection as in October and September. 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.

Using the yield curve to predict whether or nor the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next December is 1.5 percent. This drop from November's 2.3 percent and October's 3.9 percent reflects the steeper yield curve.

The Yield Curve as a Predictor of Economic Growth

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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. …

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