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UpdateJuly 26, 2001
• Yield curve story remains same. Based on historical analysis, pickup at end of 3rd quarter. Slow recovery likely.
• Volatility of the business cycle has likely decreased with increased U.S. role in world trade (economic diversification).
Note1: Some updates through July 24, 2001 based on a single observation. Most other data, quarterly averages.
Note2: Incorporates “final” first quarter 2001 GDP which was released on June 29, 2001. Advanced 2nd quarter is due July 27 (along with a revision of past two years’ data). Market expectation 0.5% annual rate.
Lead Lag Analysis in Months
NBER Peak
NBER Trough
Length of Cycle Inversion Lead Normal Lead
Length of Inversion
Dec-69 Nov-70 11 Oct-68 14 Feb-70 9 16Nov-73 Mar-75 16 Jun-73 5 Jan-75 2 19Jan-80 Jul-80 6 Nov-78 14 May-80 2 18Jul-81 Nov-82 16 Oct-80 9 Oct-81 13 12Jul-90 Mar-91 8 May-89 14 Feb-90 13 9
? ? ? Jul-00 ? Mar-01 ? 8
Average last four 11 11 7 15
Quarter
1-quarter growth (annual)
4-quarter growth (annual)
Projected from averages Q4-73 3.30% 3.90%May-01 Oct-01 5 Q1-80 1.32% 1.43%
Q3-81 4.73% 4.17%My Projection Q3-90 -0.73% 1.63%
Jan-01 Oct-01 9
Business Cycle 5-year Yield Spread
Previous first quarters of recessions
Exhibit 0
Yield Curve Inverts Before Last Five Recessions(5-year Treasury bond - 3-month Treasury bill)
-6
-4
-2
0
2
4
6
8
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
% Real annual GDP growth
Yield curve
RecessionCorrect 2 Recessions
Correct
RecessionCorrect
Recession projectedover by end 3rd Quarter
RecessionCorrect
Data though July 2001
Exhibit 1
Annual GDP growthor Yield Curve
Orange denotes consensusfor advanced Q2 GDP
Recent Annualized 1-Quarter Growth Data(10-year and 5-year Yield Curves)
-6
-4
-2
0
2
4
6
8
Mar
-95
Jun-
95Sep
-95
Dec-9
5M
ar-9
6Ju
n-96
Sep-9
6Dec
-96
Mar
-97
Jun-
97Sep
-97
Dec-9
7M
ar-9
8Ju
n-98
Sep-9
8Dec
-98
Mar
-99
Jun-
99Sep
-99
Dec-9
9M
ar-0
0Ju
n-00
Sep-0
0Dec
-00
Mar
-01
Jun-
01Sep
-01
Dec-0
1
-1.5
-1
-0.5
0
0.5
1
1.5
2% Real one-quarter GDP growth
Data though 07/23/01
Exhibit 2
Annualized 1-quarter GDP growthor Yield Curve
Both curvesinvert 2000Q3
10-year
5-year
Orange denotes consensusfor advanced Q2 GDP
High Yield at recession levels...but have they peaked?(ML High Yield Master Index minus 10-year Treasury)
-5
-2.5
0
2.5
5
7.5
10
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
% Real annual GDP growth
High Yield
Exhibit 3
4-quarter GDP growthor Yield Spread
Data though July 2001
Oil Prices associated with 4/5 last recessions....but oil might be off peak
-4
-2
0
2
4
6
8
10
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
0
6
12
18
24
30
36
42Oil Price
GDP
West Texas
Recession 2 RecessionsRecession
Recession
Exhibit 4
Data though July 2001
4-quarterGDP growth
3-and 6-month moving averages of Industrial Production growth (annual rates)
-15-12
-9-6-30369
121518
Jul-6
8Ju
l-70
Jul-7
2Ju
l-74
Jul-7
6
Jul-7
8Ju
l-80
Jul-8
2
Jul-8
4Ju
l-86
Jul-8
8Ju
l-90
Jul-9
2
Jul-9
4Ju
l-96
Jul-9
8
Jul-0
0
MA6
MA3
Recession 2 RecessionsRecession Recession
Exhibit 5
Data though July 2001
Growth •Nine straight monthly declines•In the ball park of 1990 -- but nowhere near as severe as other past episodes
Consumer Sentiment turns corner, increases in May, June and July
-4
-2
0
2
4
6
8
10
Mar
-69
Mar
-71
Mar
-73
Mar
-75
Mar
-77
Mar
-79
Mar
-81
Mar
-83
Mar
-85
Mar
-87
Mar
-89
Mar
-91
Mar
-93
Mar
-95
Mar
-97
Mar
-99
Mar
-01
60
70
80
90
100
110
MichiganIndex
GDP
Michigan Consumer Sentiment
Recession 2 RecessionsRecession
Recession
Exhibit 6
Data though July 2001
4-quarterGDP growth
