Forecasting Economic Health with One Indicator: The Yield Curve

Monday's Wall Street Journal's Money and Investing section featured a piece on the analytical import of the prolonged yield curve inversion.

By now, everybody, even those who have not studied economics, knows that inverted yield curves have, historically, frequently been associated with recessions. The trouble is, the indicator sometimes gives false positives.

Then there is the criticism that, if forecasting a recession was that easy, why aren't these economists shorting equities already?

Those doubting the indicator allege that 'this time, it's different.' They point to global demands for a safe haven for cash. Or that 'markets have changed.'

I suppose this debate will continue until either a recession does, incontrovertibly, arrive, or the economy continues its low-inflationary growth phase for another year or so.

Perhaps the moral is that you need to use multiple forecasting methods, not just the inverted yield curve, to predict recessions. Any one tool is prone to being misled. A suite of tools, providing a sort of 'information theory' approach to the task, would be better.

In the meantime, I suppose everyone will continue to watch the yield curve and the GDP's quarterly growth numbers for the next six months with heightened 'interest,' as it were.