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Economic Outlook September, 2001

The economic report delves into historical yield curve trends and their correlation with recessions, suggesting a slow recovery by the end of the 3rd quarter. It examines factors like U.S. participation in world trade and oil prices to project future GDP growth. Highlighted are insights on industrial production, consumer sentiment trends, and stock performance.

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Economic Outlook September, 2001

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  1. Economic OutlookSeptember, 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).

  2. Exhibit 0

  3. Exhibit 1 Yield Curve Inverts Before Last Five Recessions(5-year Treasury bond - 3-month Treasury bill) Annual GDP growth or Yield Curve % Real annual GDP growth Yield curve Recession Correct Recession projected over by end 3rd Quarter Recession Correct Recession Correct 2 Recessions Correct Data though August 2001

  4. Exhibit 2 Recent Annualized 1-Quarter Growth Data(10-year and 5-year Yield Curves) Annualized 1-quarter GDP growth or Yield Curve % Real one-quarter GDP growth 10-year 5-year Both curves invert 2000Q3 Data though August 2001

  5. 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 % Real annual GDP growth High Yield Data though August 2001

  6. Exhibit 4 Oil Prices associated with 4/5 last recessions....but oil might be off peak 4-quarter GDP growth Oil Price West Texas GDP Recession Recession Data though August 2001 2 Recessions Recession

  7. Exhibit 5 3-and 6-month moving averages of Industrial Production growth (annual rates) • Nine straight monthly declines • In the ball park of 1990 -- but no • where near as severe as other • past episodes • Next announcement Sept. 14, 9:15AM Growth MA3 MA6 Recession Recession Data though August 2001 2 Recessions Recession

  8. Exhibit 6 Consumer Sentiment turns corner, increases in May, June and July 4-quarter GDP growth Michigan Index Michigan Consumer Sentiment GDP Recession Recession Data though August 2001 2 Recessions Recession

  9. Exhibit 7 Stock Price Performance:Normal versus Inverted Yield CurveJanuary 1970-August 2001 Average Annual US$ Return Normal yield curve Inverted yield curve Source: Dahlquist and Harvey (2001)

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