Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, November 2013

Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, November 2013

Article excerpt

Overview of the Latest Yield Curve Figures

The yield curve became slightly steeper over the past month, with the three-month (constant maturity) Treasury bill rate steady at 0.08 percent (for the week ending November 22), which is still above September's 0.02 percent. The ten-year rate (also constant maturity) moved up to a level of 2.74 percent, up from October's 2.66 percent and above September's 2.64 percent. The slope increased to 266 basis points, up from October's 258 basis points and even rebounding past September's 262 basis points.

Highlights

              November  October  September

Three-month   0.08      0.08     0.02
Treasury
bill rate
(percent)

Ten-year      2 74      2.66     2.64
Treasury
bond rate
(percent

Yield curve   266       258      262
slope (basis
points)

Prediction    1.2       1.2      1.2
for GDP
growth
(percent)

Probability   1.86      2.24     212
of recession
in one year
(percent)

Sources Board of Governors or the Federal
Reserve System, authors' calculations

The steeper slope had a negligible impact on projected future growth. Projecting forward using past values of the spread and GDP growth suggests that real GDP will grow at about a 1.2 percentage rate over the next year, even with October and September's projections. The influence of the past recession continues to push towards relatively low growth rates. Although the time horizons do not match exactly, the forecast is slightly more pessimistic than some other predictions but like them, it does show moderate growth for the year.

The slope change had only a slight impact on the probability of a recession. 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 November is 1.86 percent, down a bit from October's estimate of 2.24 percent and September's 2.12 percent. So although our approach is somewhat pessimistic with regard to the level of growth over the next year, it is quite optimistic about the recovery continuing.

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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