It seems that economic crisis is impending, according to some accounts (60% in 10/14 Bloomberg panel, 63% in the WSJ October survey, 100% in the Wong/Winger design). WaPo “As economic downturn worries rise, Washington starts to weigh how to react”. What do easy term spread probit designs state? For economic downturn:
Figure 1: Probability of economic crisis from 10yr-3mo Treasury spread (blue), from 10yr-2yr spread (tan), based on probit design 12-month-ahead. 33% threshold in red. NBER specified peak-to-trough recession dates shaded gray. Source: Authors estimations, NBER.
The 33% threshold implies no missed out on positives for the 10yr-3mo spread, but the 10yr-2yr wouldve missed the two most recent economic downturns. Only the 10yr-2yr spread implies an economic downturn 12 months.
These probablities are based upon term spreads (October spread for information approximately 10/20):.
Our element model anticipates (as does the term spread and lagged IP model) a decline in commercial production throughout the next year. Our model does especially well vis a vis the rivals throughout durations of unfavorable output development. The favorable view from the aggregate dividend yield is rather surprising, however then, our model must surpass when financier discount rates (made up of the threat free rate and the equity risk premium) walk around a lot, which has arguably been the case
Figure 3: 10yr-3mo Treasury term spread, % (blue), and 12 month IP development rate, lead by one year, % (red). NBER specified peak-to-trough economic crisis dates shaded gray.
Utilizing the models described in Chatelais, Stalla-Bourdillon and Chinn (2022 ), we acquire the following estimates for IP growth as much as September 2023.
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What do simple term spread probit designs say? Figure 1: Probability of economic crisis from 10yr-3mo Treasury spread (blue), from 10yr-2yr spread (tan), based on probit design 12-month-ahead. Figure 2: 10yr-3mo Treasury spread (blue), 10yr-2yr spread (tan), both in %. Figure 3: 10yr-3mo Treasury term spread, % (blue), and 12 month IP development rate, lead by one year, % (red). Our aspect model forecasts (as does the term spread and lagged IP model) a decline in industrial production over the course of the next year.
Figure 2: 10yr-3mo Treasury spread (blue), 10yr-2yr spread (tan), both in %. NBER specified peak-to-trough recession dates shaded gray.
The probit models, approximated over the “Great Moderation” period, yield McFadden R2 of 27 and 18% for 10yr-2yr and 10yr-3mo spreads, respectively.
Aside from recession, one can also seek to see how financial development is predicted. Chinn-Kucko (2015) quote that each one portion point increase in the 10yr-3mo spread is associated with a 1.13% acceleration in commercial production development, over the 1998-2013 period.
In a current paper, Arthur Stalla-Bourdillon, Nicolas Chatelais and I approximate the relationship between the term spread, dividend yield, and lagged growth rate for the 12 month ahead development rate, as compared to a sectorally disaggregated divdend yield aspect, and find that our preferred disaggregated aspect outperforms the competitors, in regards to out-of-sample RMSFE comparisons. (Although the outperformance vis a vis the term spread is not statistically considerable).
Heres a photo of the existing 10yr-3mo term spread and 12 month IP development, lead one year:.
