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Graph is via personal communication from a friend who has done research on yield curve inversion as a predictor of recessions. He updated his data and sent me this:
Red arrow is a "false positive". Only one quarter of negative growth; just missed being called an official recession.
Discuss.
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Glen Rudebusch and John Williams of the Federal Reserve Bank of San Francisco recently, July 2007, published a working paper on the yield curve as a predictor for signaling future recessions.
We show that professional forecasters have essentially no ability to predict future recessions a few quarters ahead. This is particularly puzzling because, for at least the past two decades, researchers have provided much evidence that the yield curve, specifically the spread between long- and short-term interest rates, does contain useful information at that forecast horizon for predicting aggregate economic activity and, especially, for signaling future recessions. We document this puzzle and suggest that forecasters have generally placed too little weight on yield curve information when projecting declines in the aggregate economy.
Its particularly interesting that as part of their conclusion they state
"Finally, it is interesting to note that many times during the past twenty years forecasters have acknowledged the formidable past performance of the yield curve in predicting expansions and recessions but argued that this past performance did not apply in the current situation. That is, signals from the yield curve have often been dismissed because of supposed changes in the economy or special factors influencing interest rates. This paper, however, shows that the relative predictive power of the yield curve does not appear to have diminished much, if at all." and the fist response in this thread is arguing that it does not apply in the current situation as things have changed.
http://www.frbsf.org/publications/ec.../wp07-16bk.pdf