Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, October 2013

Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, October 2013

Article excerpt

Overview of the Latest Yield Curve Figures

Concerns over the debt ceiling apparently had some impact on the shorter end of the yield curve, pushing the three-month Treasury bill rate up to 0.08 percent (for the week ending October 18), the highest level since March and a big jump up (at these low levels, anyway) from Septembers 0.02 percent and even August's 0.05 percent. The ten-year rate moved up, but not as much (cither absolutely or proportionally) to 2.66 percent, above September's 2.64 percent, but below Augusts 2.73 percent. The slope decreased to 258 basis points, down from September's 262 basis points, and August's 268 basis points.

Highlights
                October  September  August

Three-month     0.08     0.02       005
Treasury bill
rete (percenl)


Ten-year        266      264        273
Treasury bond
rate (percent)


YIOld curve     258      262        268
slope (basis
points)

PredictlOl1              1.1        0.9
fOf GOP growth
(percenl)

Probability              2.12       223
ofrecessionin
one year
(percent)

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 September's rate and just up from August's rate of 1.1 percent. The influence of the past recession continues to push toward relatively low growth rates. Although the time horteons 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 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 October is 2.24 percent, up from last month's 2.12 percent and just above Augusts 2.23 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 Spread and Real GDP 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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