E Interest Rates Are Not A Leading Indicator

Interest rates are not a leading indicator. Or at least they are not a dependable leading indicator. Scott Sumner posts that that bond market was a leading indicator of the 1st quarter GDP decline to .7 percent. He went on to comment about hard data. More on that later.

However, we should take a look at the graph showing the overlapping 10 year and the real GDP:

Real GDP in Blue. Interest Rates on 10 Year T Bond in Red

It is certainly true that in the Great Recession and in other recessions, the decline in real GDP was in no way preceded by a decline in the 10 year yield. And it is true that in in the Great Recession, the decline in the 10 year was a lagging indicator. And, the decline in the 10 year yield between 1980 and 1998 took place while real GDP was actually increasing.

Dr. Sumner would have difficulty making a case for the 10 year yield being a leading indicator. In fact, even in his view that the 10 year forecast a poor GDP, yield pushed up again right before the announcement. Some may have got a small insight but it is not something trustworthy, based on history.

However, Sumner is correct that hard-data-based assessment of GDP by the Atlanta Fed was superior to soft data predictions of GDP by the New York Fed. The Atlanta Fed predicted .2 percent growth and the New York Fed was way off base, predicting a 2.7 percent growth. That prediction makes you wonder about central banking in general.

But Sumner does not like data based predictions. He wants forecasts, like an NGDP futures market. Whether that would work is anyone's guess. Some have posted on the Sumner blog that it could be subject to manipulation. Others say it could be too complex. Others say it would put the Fed in a box, or maybe make it behave. The Fed will never behave. It has too much interest in liquidation every 75 or so years to really behave.

But we can leave the economists to sort out the merits and the likelihood of an NGDP Targeting (Nominal GDP Targeting) Futures Market. Certainly, watching NGDP is worthwhile, as it declined in the Great Recession way before inflation declined. The Fed should watch it carefully.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Norman Mogil 3 years ago Contributor's comment


Soft data suffers from a lot of auto-correlation. The stock market takes its cue from a buoyant consumer sentiment number. That number includes a measure of the stock market and how the consumer feels richer. Higher consumer sentiment then feeds back into the stock market and the loop is complete.

I never use soft data for this reason

Gary Anderson 3 years ago Author's comment

I think soft data only makes sense in a robust economy. And it looks like robust is happening in other parts of the world more than in paycheck to paycheck America.