Yield curve and predicted GDP growth, February 2012.Overview of the Latest Yield Curve Figures
Over the past month, the yield curve has flattened somewhat, as short rates moved up while longer rates barely budged. The three-month Treasury bill rose to 0.11 percent (for the week ending February 17), up from January's 0.04 percent and December's 0.01 percent. The ten-year rate stayed below two percent, but not by much, coming in at 1.97 percent, just up from January's 1.96 percent and December's 1.94 percent. The twist dropped the slope a bit, to 186 basis points, down six points from January s 192 bp and also below December s 193bp.
The lower slope was not enough to have an appreciable change in projected future growth, however. Projecting forward using past values of the spread and GDP GDP (guanosine diphosphate): see guanine. growth suggests that real GDP will grow at about a 0.7 percent rate over the next year, equal to the past two months. The strong influence of the recent recession is leading towards relatively low growth rates Growth Rates
The compounded annualized rate of growth of a company's revenues, earnings, dividends, or other figures.
Remember, historically high growth rates don't always mean a high rate of growth looking into the future. . 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.
Likewise, there was little change in the probability of 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 February at 6.9 percent, a bit above January s at 6.4 percent, and Decembers at 6.5 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic op·ti·mist
1. One who usually expects a favorable outcome.
2. A believer in philosophical optimism.
op 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 NOTORIETY, evidence. That which is generally known.
2. This notoriety is of fact or of law. In general, the notoriety of a fact is not sufficient to found a judgment or to rely on its truth; 1 Ohio Rep. as a simple forecaster of economic growth. The rule of thumb is that an inverted yield curve Inverted Yield Curve
Usually a chart showing long-term debt instruments that have lower yields than short-term debt instruments. It is sometimes referred to as a negative 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 NBER National Bureau of Economic Research (Cambridge, MA)
NBER Nittany and Bald Eagle Railroad Company ). One of the recessions predicted by the yield curve was the most recent one. The yield curve inverted inverted
reverse in position, direction or order.
inverted L block
a pattern of local filtration anesthesia commonly used in laparotomy in the ox. 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.
More generally, a flat curve indicates weak growth, and conversely, a steep curve indicates strong growth. One measure of slope, the spread between ten-year Treasury bonds and three-month Treasury bills, bears out this relation, particularly when real GDP growth is lagged a year to line up growth with the spread that predicts it.
Predicting GDP Growth
We use past values of the yield spread and GDP growth to project what real GDP will be in the future. We typically calculate and post the prediction for real GDP growth one year forward.
Predicting the Probability of Recession
While we can use the yield curve to predict whether future GDP growth will be above or below average, it does not do so well in predicting an actual number, especially in the case of recessions. Alternatively, we can employ features of the yield curve to predict whether or not the economy will be in a recession at a given point in the future. Typically, we calculate and post the probability of recession one year forward.
Of course, it might not be advisable to take these numbers quite so literally, for two reasons. First, this probability is itself subject to error, as is the case with all statistical estimates. Second, other researchers have postulated that the underlying determinants of the yield spread today are materially different from the determinants that generated yield spreads during prior decades. Differences could arise from changes in international capital flows and inflation expectations, for example. The bottom line is that yield curves contain important information for business cycle analysis, but, like other indicators, should be interpreted with caution. For more detail on these and other issues related to using the yield curve to predict recessions, see the Commentary "Does the Yield Curve Signal Recession?" Our friends at the Federal Reserve Bank of New York The Bank of New York, abbrieviated to BNY, was a global financial services company that existed until its merger with the Mellon Financial Corporation on July 2, 2007. The bank now continues under the new name of The Bank of New York Mellon Corporation. also maintain a website with much useful information on the topic, including their own estimate of recession probabilities.
Highlights February January December 3-month 0.11 0.04 0.01 Treasury bill rate (percent) 10-year 1.97 1.96 1.94 Treasury bond rate (percent) Yield curve 186 192 193 slope (basis points) Prediction 0.7 0.7 0.7 for GDP growth (percent) Probability 6.9 6.4 6.5 of recession in 1 year (percent)
Covering January 21, 2012-February 24, 2012