Update
July 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.
Exhibit 0
Lead Lag Analysis in Months
Business Cycle 5-year Yield Spread
NBER NBER Length Length of
Peak Trough of Cycle Inversion Lead Normal Lead Inversion
Dec-69 Nov-70 11 Oct-68 14 Feb-70 9 16
Nov-73 Mar-75 16 Jun-73 5 Jan-75 2 19
Jan-80 Jul-80 6 Nov-78 14 May-80 2 18
Jul-81 Nov-82 16 Oct-80 9 Oct-81 13 12
Jul-90 Mar-91 8 May-89 14 Feb-90 13 9
? ? ? Jul-00 ? Mar-01 ? 8
Average last four 11 11 7 15
Previous first quarters of
recessions
1-quarter 4-quarter
growth growth
Quarter (annual) (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
Exhibit 1
Yield Curve Inverts Before Last Five Recessions
(5-year Treasury bond - 3-month Treasury bill)
Annual
Orange denotes consensus
GDP growth
for advanced Q2 GDP
or Yield Curve
8 % Real annual GDP growth
6
4
2
Yield curve
0
-2
Recession Recession Recession projected
Correct Correct over by end 3rd Quarter
-4 Recession
Correct 2 Recessions Data though July 2001
Correct
-6
9
1
3
5
7
9
1
3
5
7
9
1
3
5
7
9
1
-6
-7
-7
-7
-7
-7
-8
-8
-8
-8
-8
-9
-9
-9
-9
-9
-0
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
Exhibit 2
Recent Annualized 1-Quarter Growth Data
(10-year and 5-year Yield Curves)
Annualized
1-quarter
Orange denotes consensus
GDP growth for advanced Q2 GDP
or Yield Curve % Real one-quarter GDP growth
8 10-year 2
6 1.5
4 1
2 0.5
0 0
5-year Both curves
-2 invert 2000Q3 -0.5
-4 -1
Data though 07/23/01
-6 -1.5
Se -95
Se -96
Se -97
Se -98
Se -99
Se -00
Se -01
M -95
M -96
M -97
M -98
M -99
M -00
1
Ju 95
Ju 96
Ju 97
Ju 98
Ju 99
Ju 00
Ju 01
D 95
D 96
D 97
D 98
D 99
D 00
D 01
-0
-
-
-
-
-
-
-
p-
p-
p-
p-
p-
p-
p-
n
n
n
n
n
n
n
ec
ec
ec
ec
ec
ec
ec
ar
ar
ar
ar
ar
ar
ar
M
Exhibit 3
High Yield at recession levels...but have they peaked?
(ML High Yield Master Index minus 10-year Treasury)
4-quarter
GDP growth
or Yield Spread
10 % Real annual GDP growth
7.5
5
High Yield
2.5
0
-2.5
Data though July 2001
-5
9
1
3
5
7
9
1
3
5
7
9
1
3
5
7
9
1
-6
-7
-7
-7
-7
-7
-8
-8
-8
-8
-8
-9
-9
-9
-9
-9
-0
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
Exhibit 4
Oil Prices associated with 4/5 last recessions
....but oil might be off peak
4-quarter
GDP growth Oil Price
10 42
West Texas
8 36
GDP
6 30
4 24
2 18
0 12
Recession
-2 Recession 6
Recession 2 Recessions Data though July 2001
-4 0
9
1
3
5
7
9
1
3
5
7
9
1
3
5
7
9
1
-6
-7
-7
-7
-7
-7
-8
-8
-8
-8
-8
-9
-9
-9
-9
-9
-0
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
Exhibit 5
3-and 6-month moving averages of
Industrial Production growth (annual rates)
Growth •Nine straight monthly declines
•In the ball park of 1990 -- but no
MA3
18 where near as severe as other
15 past episodes
12
9
6
3
0
-3
-6 MA6
-9 Recession
Recession
-12 2 Recessions Data though July 2001
Recession
-15
8
0
2
4
6
8
0
2
4
6
8
0
2
4
6
8
0
l-6
l-7
l-7
l-7
l-7
l-7
l-8
l-8
l-8
l-8
l-8
l-9
l-9
l-9
l-9
l-9
l-0
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Ju
Exhibit 6
Consumer Sentiment turns corner, increases in
May, June and July
4-quarter
Michigan
GDP growth
10 Index
110
Michigan Consumer Sentiment
8
GDP 100
6
4 90
2 80
0
Recession
70
-2 Recession
2 Recessions Data though July 2001
Recession
-4 60
9
1
3
5
7
9
1
3
5
7
9
1
3
5
7
9
1
-6
-7
-7
-7
-7
-7
-8
-8
-8
-8
-8
-9
-9
-9
-9
-9
-0
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
ar
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M
M