Monday, April 25, 2005

The Big Picture: Economy Yield Curve vs. Unemployment Less Inflation

The Big Picture: Economy

This past Saturday, I pulled up an old Federal Reserve Study to show that one can predict economic growth by paying close attention to the yield curve. Today, I was delighted to find a beautiful chart on Barry's site that shows the same yield curve analysis versus the inflation adjusted unemployment change.

There are a number of reasons I like the chart. One is that it shows how the yield curve projected very strong growth in 1992 and it then called for gradually slower growth through the rest of that expansion. For some reason, many newsletter writers seem to be frightened that our current rate of growth is slowing. It makes no sense to be frightened of something that is natural and predictable.

I encourage my readers to take a look at the chart. Note the times the red line was below zero. You have to be on the look out for these troublesome periods but note that we are nowhere near the zero line and indeed we are close to the average area for the past 50 years.

Yes, growth has slowed, but coming off the recession our economy grew at a nominal rate of 8%! Who would ever expect that kind of rate to continue. Two percent inflation adjusted growth is fantastic. Just what we need and just what the yield curve is forecasting!