Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, June 2014

Magazine article Economic Trends

Yield Curve and Predicted GDP Growth, June 2014

Article excerpt

Overview of the Latest Yield Curve Figures

Since last month, the yield curve pivoted back upward around the short end. The three-month (constant maturity) Treasury bill rate stayed fixed at 0.03 percent (for the week ending June 20), even with April and May's 0.03 percent. . The ten-year rate (also constant maturity) increased to 2.63 percent, up 9 basis points from May's 2.54 percent, but still down from April's level of 2.71 percent. The pivot increased the slope back up to 260 basis points, above May's 251 basis points, though down from the April level of 268 basis points. By recent standards, the yield curve remains steep, as the mean slope since 2000 has been 193 basis points (median of 218).

The steeper slope had a small 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 1.4 percentage rate over the next year, even with May's rate and just down from April's rate of 1.5 percent. The influence of the past recession continues to push towards relatively low growth rates. Although the time horizons do not match exactly, the forecast comes in 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 a recession in the future, we estimate that the expected chance of the economy being in a recession next June at 1.99 percent, down a bit from May's reading of 2.31 percent, but up a bit from April's probability of 1.78 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 preceeded 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. There have been two notable false positives: an inversion in late 1966 and a very flat curve in late 1998. …

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