The forecast is based on the rise in the 5-year U.S. Treasury yield from its lowest level relative to the 2- and 10-year notes since 2001. The last two times that occurred, during the 1990 and 2001 recessions, the economy started to expand within nine months.
Famous last words
Economist David H. Wang agreed that the indicator has accurately predicted previous recoveries. "It's been an accurate indicator, famous last words," Wang told BloggingStocks Monday.
However, Wang cautioned that the nation's public officials, corporate America and individuals can't overlook, or neglect to prepare for, what's in-between.
"We're still looking at, most likely, two quarters of negative GDP," Wang said. "And I would caution that the yield curve predictor is not perfect. The correlation is not perfect and it is not guaranteed. Something could occur to deflect or delay the recovery. And we still have a lot of unknowns regarding subprime mortgage defaults and write-offs, and credit market issues. I just mention the above to give investors a proper perspective concerning the economy's overall health. We still have many problems to address before we're on a sound economic footing."
Fed rate cuts, fiscal stimulus help
Nevertheless, Wang said the U.S. Federal Reserve's interest rate cuts and the $168 billion Congressionally-approved fiscal stimulus package that President Bush will sign are two major steps in the right direction. The Fed's ongoing term-auction facility is a third, he said.
"The financial markets are still subject to jolts from write-offs and losses, but there are now mechanisms in place to maintain liquidity, which is essential to restore economic health, and the fiscal stimulus will create some consumer and business demand, another positive," Wang said. "With a moderation in oil prices we should see an economy well into recovering before the new president raises his right hand to take the oath of office next year."
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