Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, October 2012

Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, October 2012

Article excerpt

Covering September 26, 2012--October 26, 2012 by Joseph G. Haubrich and Patricia Waiwood

Overview of the Latest Yield Curve Figures

Over the past month, the yield curve has gotten imperceptibly flatter, as both long and short short rates crept down, nearly in parallel. The three-month Treasury bill fell back to 0.1 percent (for the week ending October 19), just down from September's 0.11 percent and level with 0.10 percent seen in August. The ten-year rate dropped by a whopping 2 basis points, coming in at1.79 percent, down from September's 1.81 percent, but still a bit above August's 1.76 percent. The twist decrease the slope to 169 basis points, a hair below September's 170 basis points, but just a bit above August's 166 basis points.


The steeper slope was not enough to have an appreciable change in projected future growth, however. Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 0.6 percent rate over the next year, even with both August and September. The strong influence of the recent recession is still leading towards relatively low growth rates. Although the time horizons do not match exactly, the forecast comes in on the more pessimistic side of other predictions but like them, it does show moderate growth for the year.

The barely flatter slope did not lead to much of a change on the recession front, and you wouldn't expect it to. 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 October is 8.2 percent, up just a bit from the September probability of 8.1 percent, down from August's 8.5 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic about the recovery continuing.


                                       October  September  August

3-month Treasury bill rate (percent)      0.10       0.11    0.10

10-year Treasury bond rate (percent)      1.79       1.86    1.76

Yield curve slope (basis points)           169        170     166

Prediction for GDP growth (percent)        0.6        0.6     0.6

Probability of recession in 1 year         8.2        8.1     8.5

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). …

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