economic outlook september, 2001 yield curve story remains same. based on historical analysis,...
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Economic OutlookSeptember, 2001
• Yield curve story remains same. Based on historical analysis, pickup at end of 3rd quarter. Slow recovery likely.
• Volatility of the business cycle has likely decreased with increased U.S. role in world trade (economic diversification).
Lead Lag Analysis in Months
NBER Peak
NBER Trough
Length of Cycle Inversion Lead Normal Lead
Length of Inversion
Dec-69 Nov-70 11 Oct-68 14 Feb-70 9 16Nov-73 Mar-75 16 Jun-73 5 Jan-75 2 19Jan-80 Jul-80 6 Nov-78 14 May-80 2 18Jul-81 Nov-82 16 Oct-80 9 Oct-81 13 12Jul-90 Mar-91 8 May-89 14 Feb-90 13 9
? ? ? Jul-00 ? Mar-01 ? 8
Average last four 11 11 7 15
Quarter
1-quarter growth (annual)
4-quarter growth (annual)
Projected from averages Q4-73 3.30% 3.90%May-01 Oct-01 5 Q1-80 1.32% 1.43%
Q3-81 4.73% 4.17%My Projection Q3-90 -0.73% 1.63%
Jan-01 Oct-01 9
Business Cycle 5-year Yield Spread
Previous first quarters of recessions
Exhibit 0
Yield Curve Inverts Before Last Five Recessions(5-year Treasury bond - 3-month Treasury bill)
-6
-4
-2
0
2
4
6
8
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
% Real annual GDP growth
Yield curve
RecessionCorrect 2 Recessions
Correct
RecessionCorrect
Recession projectedover by end 3rd Quarter
RecessionCorrect
Data though August 2001
Exhibit 1
Annual GDP growthor Yield Curve
Recent Annualized 1-Quarter Growth Data(10-year and 5-year Yield Curves)
-6
-4
-2
0
2
4
6
8
Mar
-95
Jun-
95Sep
-95
Dec-9
5M
ar-9
6Ju
n-96
Sep-9
6Dec
-96
Mar
-97
Jun-
97Sep
-97
Dec-9
7M
ar-9
8Ju
n-98
Sep-9
8Dec
-98
Mar
-99
Jun-
99Sep
-99
Dec-9
9M
ar-0
0Ju
n-00
Sep-0
0Dec
-00
Mar
-01
Jun-
01Sep
-01
Dec-0
1
-1.5
-1
-0.5
0
0.5
1
1.5
2% Real one-quarter GDP growth
Exhibit 2
Annualized 1-quarter GDP growthor Yield Curve
Both curvesinvert 2000Q3
10-year
5-year
Data though August 2001
High Yield at recession levels...but have they peaked?(ML High Yield Master Index minus 10-year Treasury)
-5
-2.5
0
2.5
5
7.5
10
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
% Real annual GDP growth
High Yield
Exhibit 3
4-quarter GDP growthor Yield Spread
Data though August 2001
Oil Prices associated with 4/5 last recessions....but oil might be off peak
-4
-2
0
2
4
6
8
10
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
0
6
12
18
24
30
36
42Oil Price
GDP
West Texas
Recession 2 RecessionsRecession
Recession
Exhibit 4
4-quarterGDP growth
Data though August 2001
3-and 6-month moving averages of Industrial Production growth (annual rates)
-15-12
-9-6-30369
121518
Jul-6
8Ju
l-70
Jul-7
2Ju
l-74
Jul-7
6
Jul-7
8Ju
l-80
Jul-8
2
Jul-8
4Ju
l-86
Jul-8
8Ju
l-90
Jul-9
2
Jul-9
4Ju
l-96
Jul-9
8
Jul-0
0
MA6
MA3
Recession 2 RecessionsRecession Recession
Exhibit 5
Growth •Nine straight monthly declines•In the ball park of 1990 -- but nowhere near as severe as other past episodes•Next announcement Sept. 14, 9:15AM
Data though August 2001
Consumer Sentiment turns corner, increases in May, June and July
-4
-2
0
2
4
6
8
10
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
60
70
80
90
100
110
MichiganIndex
GDP
Michigan Consumer Sentiment
Recession 2 RecessionsRecession
Recession
Exhibit 6
4-quarterGDP growth
Data though August 2001
Stock Price Performance: Normal versus Inverted Yield Curve
January 1970-August 2001
-10
-5
0
5
10
15
20
25
30
35
Canad
a
German
y
France
Hong K
ong Italy
Japan UK
Dow Jone
s
S&P 500
Nasdaq
Average AnnualUS$ Return
Source: Dahlquist and Harvey (2001)
Normal yield curve
Inverted yield curve
Exhibit 7