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Campbell R. Harvey
Duke University, Durham, NC USA
National Bureau of Economic Research, Cambridge MA USA
Cam.harvey@duke.edu
+1 919.660.7768 office || +1 919.271.8156 mobile
http://www.duke.edu/~charvey
1
Issue
• Current global financial turmoil focuses on the potential
impact of a U.S. recession
• I pioneered in my 1986 dissertation at the University of
Chicago a recession prediction model linked to the term
structure of interest rates
• For over a year, the model has signaled a U.S. recession
2
Historical Track Record
• Yield curve measure attracted significant attention in
accurately forecasting the last six recessions
• The measure also avoided false signals (for example, it
forecasted strong growth in 1988 after the October 1987
crash and it forecasted strong growth in 1999 after the
August 1998 financial crisis).
3
Evaluation of the 2001 Recession
• In July 2000, the yield curve inverted forecasting recession
to begin in June 2001.
• Official NBER Peak is March 2001 (yield curve within
one quarter accurate).
• In March 2001, the yield curve returned to normal
forecasting the end of the recession in November 2001.
• On July 17, 2003 the NBER announced the official end of
the recession was November 2001.
4
Exhibit 1
Current Episode
? ? ? Jul-06 May-07 11
5
Yield Curve Inverts Before Last Six Recessions
(5-year Treasury note minus 3-month Treasury bill yield – constant maturity)
Annual
GDP growth
% Real annual GDP growth
or Yield Curve %
8
0 Yield curve
-2
Recession
Correct Recession
-4 Correct 2 Recessions
Data though Dec. 1986
Correct
-6
90
92
94
96
98
00
02
04
06
08
68
70
72
74
76
78
80
82
84
86
88
19
19
19
19
19
20
20
20
20
20
19
19
19
19
19
19
19
19
19
19
19
6
Source: Campbell R. Harvey. Update of Harvey (1986, 1988, 1989, 1991).
Yield Curve Inverts Before Last Six Recessions
(5-year Treasury note minus 3-month Treasury bill yield – constant maturity)
Annual
GDP growth
% Real annual GDP growth
or Yield Curve %
8
0 Yield curve
Recent
inversion
-2 Recession
Recession Yield curve accurate
Correct Recession Correct in previous recession
-4 Correct 2 Recessions
Data though Apr. 2008
Correct
-6
88
90
92
94
96
98
00
02
04
06
08
68
70
72
74
76
78
80
82
84
86
19
19
19
19
19
20
20
20
20
20
19
19
19
19
19
19
19
19
19
19
19
7
Source: Campbell R. Harvey. Update of Harvey (1986, 1988, 1989, 1991).
Recent Annualized One-Quarter GDP Growth
(10-year and 5-year Yield Curves-secondary market)
Annualized
10-year
1-quarter
GDP growth Yield curve
8 % Real annualized one-quarter GDP growth
4
6 3
4 2
2 1
0 0
-4 -2
S e 95
S e 96
Se -97
Se -98
S e 99
S e 00
Se -01
Se -02
Se 03
S e 04
Se -05
Se -06
S e 07
S e 08
M -95
M 96
M 97
M 98
M -99
M 00
M 01
M 02
M -03
M 04
M 05
M 06
M -07
08
8
-
-
-
-
p-
p-
p-
p-
p-
p-
p-
p-
p-
p-
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
p
p
M
Current Recession Forecast
• In July 2006, the Yield Curve inverts for 11 months
• Lead time to NBER Peak is 9-15 months over last six
business cycles
• Model predicts recession beginning 2007Q4
• Model predicts recovery beginning 2008Q4
9
Evaluation of Current Situation
10
Mitigating factors
11
Current Situation
12
Current Situation
13
Current Situation
14
Current Situation
15
Current Situation
16
Interpretation
18