Making Forecasts

Contributors

Will McIntosh
Global Head of Research

John Kirk
Senior Director, Research

Mark Fitzgerald
Senior Director, Research

September 2015

Will an inverted yield curve predict the next recession … again?

“If I knew that, I would be on my yacht right now!” is the common cry from researchers when asked to predict the next recession. For decades, even the most astute forecasters have struggled to foresee economic downturns. In 1929, the Harvard Economic Society famously declared a depression was “outside the range of probability,” and shortly thereafter, the U.S. economy sank into the deepest depression on record. Similarly, a 2007 survey by Blue Chip Economic Indicators projected 2.2 percent GDP growth in 2008; instead, the economy declined –0.3 percent.

This is not to say forecasting is futile; in fact, there is significant merit in developing a strategic economic outlook. Unfortunately, many recession indicators tend to be unreliable. One signal, however, has foreshadowed the previous seven U.S. recessions. For many interest rate watchers, the yield curve inversion has become synonymous with economic slumps, which raises the question: Can we count on the inverted yield curve to be a leading indicator of the next recession?

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