This study reexamines and confirms the power of the yield at predicting changes in real gross domestic product. The visual representation of the current growth in real GDP and the yield curve four quarters earlier did accurately capture the recessions of 2001 and 2008-9. However the model of marginal change in GDP using the current yield spread failed to predict the recent past recessions.
It’s challenging to predict the peak and trough of the business cycle. There is a lag between the time of a peak or a trough and the official announcement by the National Bureau of Economic Research (NBER). For example, it took the National Bureau of Economic Research about twelve months to declare in December 2008 that the economy had reached a peak in December 2007. It also took NBER until November, 2001 to announce the beginning of the recession that had started in March of that year. Because of this lag, there is a great need for economic indicators that can accurately forecast in a timely fashion the direction of the economy. Such indicators could be leveraged by academics, the business community, and policymakers who are constantly looking for insights as how to carry out research, make business decisions or design fiscal and monetary policy.
There are several leading economic indicators that help predict future business cycles. From time to time one or a set of indicators have exhibited greater power predictability. Bernanke and Blinder (1992) found that the Federal Fund Rate is a good predictor of the impact of monetary policy on real macroeconomics variables. The Leading Economic Indicators Index published monthly by the Conference Board, a private economics research group, includes ten indicators. The index helps forecast economic activity for a six or nine-month horizon.