Economists generally see the yield curve as a reasonably good indication of where the economy is heading.
Yield Curve from 1970-2014
Here’s an animated GIF of the yield curve from 1970 to March 2014.
The GIF shows the inverted yield curve briefly in the early 1970s, coinciding with NBER’s December 1969 to November 1970 recession.
After 1970, the yield curve generally floated in a normal range.
That changed in mid-1973, coinciding with the oil crisis and the onset of stagnation. The yield curve stayed in the inverted shape until mid-1974, after which it returned to normal. The mid-1970s recession officially ended in March 1975.
The economy performed decently until mid-1978, at which point the yield curve inverted again. In its history, the yield curve has never gotten as inverted as it did in the late 1970s and early 1980s. Overall, the yield curve stayed generally inverted for almost three years, until late 1981.
After Paul Volker’s successful defeat of inflation – and a severe recession that caused Jimmy Carter to lose the Presidency — the yield curve stayed in normal range for range for almost 25 years.
Inversion and flatness in the yield curve
As a note, as is shown in the graphic, there were some very brief periods of inversion and flatness in the yield curve in the late 1980s, late 1990s, and early 2000s, but nothing as dramatic as that experienced in the 1970s, and nothing that would have been a tale-tale sign of impending economic malaise.
The 25-year inversion vacation ended in 2006, when central banks around the world began addressing white-hot economies bouncing from, among other things, a worldwide housing market boom.
From early 2006 to late 2007, the yield curve was moderately inverted.
Interestingly, at the time economists missed or (more likely) preferred to ignore the signal the yield curve was sending.
That changed in 2008, when the world’s economies quickly deteriorated from the credit market and housing market bubbles.
The yield curve has now held a moderate, normal upward bias since the end of the recent financial crisis more than four years ago.
Perhaps unsurprisingly, over this more than four years, the yield curve has floated in a creepily narrow range, much more narrow than we’ve seen in a long time.
Of course, a major culprit of the narrow range is paternalistic central bankers and markets still nervous about the economic recovery (for sure, it’s probably more policy meddling than markets).
What periods does the current yield curve compare to?
If one does a second and third look at the animation, it certainly looks as though the yield curve thinks it’s around 1997.
Interestingly, the equity markets appear to think it’s the late 1990s as well? (Take a second look below if you’re unconvinced.)