Term Spreads and Recessions, Country by Country Evidence – a Very Incomplete Review

Dr. Rosser asks what is the evidence for term spreads predicting recessions, with special reference to Japan. Here is my partial answer:

Chinn and Kucko (2015) examine data over the 1970-2013 period, and obtain the following results:

Source: Chinn and Kucko (2015).

The Economist article on this subject is here.

Note that this specification includes a three month yield in addition to the 10yr-3mo spread. The results are largely the same for the simpler specification using only the spread, except that the spread is then not statistically significant for Japan.

There are surely numerous other studies of how the term spread predicts recessions or growth, for sets of countries; Haubrich (2020) reviews some of those studies. However, the more recent studies usually rely on panel analysis. See for instance Gebka and Wohar (2018) or Borio, Drehman and Xia (2018), or Hasse and Laujaunie (2020), so we don’t know what specification does well for a given country. (And of course, Mehl’s (2009) study is the most comprehensive for emerging/developing countries.)

My cautionary tale for China, here.

Flurry of Fed studies on the term spread in June of this year, Kiley (2022), Hornstein (2022), and Bauer and Mertens (2022).

Ahmed and Chinn (2022) discusses the 10yr-3mo term spread, augmented by foreign term spread, as a predictor.




22 thoughts on “Term Spreads and Recessions, Country by Country Evidence – a Very Incomplete Review

  1. pgl

    The other day Dr. Chinn had a post noting how much the payroll survey of employment has grown and yet the household survey shows no net growth since March 2022. Since the beginning of the year, the former has increased by 3.8 million.

    Now Princeton Steve rehashed his old discredited notion that this difference represents an increase in multiple job holdings. He went on and on with fancy terms like mean revision and extrapolation. Only problem is he never actually ran the basic arithmetic. It seems the increase in multiple job holdings since the beginning of the year has been a mere 175 thousand.

    Come on folks – presenting data is crucial. And FRED makes this easy. This issue is nothing more than a simple arithmetic issue first graders could do. But not some of our favorite trolls.

  2. pgl

    Trump’s dinner guests at Maro Lago include some of our favorite characters:


    A prominent adherent of the QAnon and “pizzagate” conspiracy theories posed for photos with former President Donald Trump at his Mar-a-Lago resort Tuesday night after speaking at an event hosted at the club, according to the photos and videos posted to social media. The event came two weeks after Trump had dinner at Mar-a Lago with rapper Ye, formerly known as Kanye West, who recently spoke positively about Hitler, and far-right YouTuber Nick Fuentes, who the Department of Justice has labeled a white supremacist. The meeting sparked outrage despite Trump’s claim he did not know who Fuentes was. Videos and photos posted to social media appear to show Liz Crokin, a prominent promoter of QAnon and pro-Trump conspiracies theories, speaking at an event at Mar-a-Lago and later posing for photos with Trump. In one photo, the duo make a “thumbs up” sign together.

    1. Gregory Bott

      All part of kosher nationalism and its global industry. In truth, it all goes back to 2000’s neoconservatives. A con of a con.

    2. AndrewG

      Everything’s going so well on the legal side of things, Trump must be saying to himself, why not let my QAnon freak flag fly?

      WaPo: Trump Team Found *More* Classified Docs In A Storage Unit
      By Kaila Philo| December 7, 2022 5:43 p.m.
      Turns out that Trump did in fact have more classified documents scattered throughout his properties. …

      New documents found by his own team of lawyers! Suggesting that we suspend the Constitution is totally normal when you’re winning so much.

      Besides, Trump peddling antisemitism is nothing new:

      Donald Trump’s Closing Ad Has Anti-Semitic Overtones
      Not a great look for a campaign with record support from white nationalists and neo-Nazis.
      By Daniel Marans | Nov 5, 2016, 05:09 PM EDT

      Donald Trump’s final campaign advertisement appears to employ classic anti-Semitic innuendo.

      “The establishment has trillions of dollars at stake in this election,” the GOP presidential nominee warns in the two-minute video. “For those who control the levers of power in Washington and for the global special interests, they partner with these people that don’t have your good in mind.”

      As Trump says “levers of power in Washington,” we see footage of George Soros, a billionaire investor and philanthropist. And when Trump says, “global special interests,” Federal Reserve chairwoman Janet Yellen appears on screen.

      Both Soros and Yellen are Jewish. …

      Happy Day That Will Live in Infamy! Or as Sean Spicer calls it, D-Day …

      Sean Spicer confuses Pearl Harbor anniversary with D-day
      Trump’s former press secretary apologized for his error, after criticizing Biden for not acknowledging D-day last year

      1. Moses Herzog

        This is why I do not understand why conservative Jews, Orthodox Jews, and Israelis gravitate to this orange bastard. [ ????? ] Complete mystery to me. And a frustrating mystery. It’s masochistic, and leaves me wondering, are the Jewish MAGA fans the “self-hating” Jews I have heard talked of, but rarely seen??

        Apparently so……

        1. Barkley Rosser


          These people ally with Netanyahu and the right wing in Israel, which Trump supports and gave them a lot of things they wanted while president to the point that Bibi actually named some plot of land there for Trump.

          1. Moses Herzog

            @ Dr. Rosser
            As a Goy or Goyim (whatever), and I say this with the most seriousness and earnestness. I view Jews as the greatest race on Earth (anyone can say this is for religious reasons, but it is “in tandem” with facts, ask me to present the facts) Uuuuuhh, it’s really still not understandable to me, U.S. embassy moved to Jerusalem AND ALL, how they can “like” the orange creature. Even pretend liking the orange creature is dangerous

          2. Barkley Rosser


            Netanyahu and his Orthodox allies in the US like the fact that Trump moved the embassy to Jerusalem. That is a fact.

        2. Barkley Rosser


          The real mystery is why is Trump hanging out with these blatant anti-Semites when his own grandchildren are Jewish.

          There are plenty of varying views among Jews themselves about lots of things. Heck, there are something like 26 different sects of Hasidism, with a wide variety among them of views about Israel itself, with some of them saying it should not exist even as they have members living there all the way over to ones that are super hawkish. I imagine they have a wide variety of views on Trump as well, and that is not even the totality of Orthodox Judaism, with many Orthodox Jews not being Hasidic and also having several factions among themselves.

  3. ltr

    All part of —— nationalism and its global industry.

    [ This is a false, a prejudiced, an anti-Semitic, expression. ]

    1. Moses Herzog

      @ ltr
      You need to go back to some remedial English class. Roughly 4th grade level or lower. Either your Chinese English teachers taught you very wrong, or you had a very shitty foreign English teacher. Based on my personal observations of 7 years in northeast China at “key” universities, former cadre stepping stone universities, and the crappiest start-up private schools you could imagine, either/both are very entirely possible.

  4. Not Trampis

    From a yield curve junkie down under. A recession will occur when short rates are driven up by central banks not so much if bond yields fall

    1. Macroduck

      A central-bank-induced recession results from the bank raising rates. There are other types of recession, anticipation of which might drive down long rates. Hard to argue the Fed caused the Covid recession, and it probably didn’t cause the Y2K recession.

  5. Barkley Rosser

    Thank you, Dr. Chinn.

    So, indeed there is quite a bit of variation across countries of what works and what does not, with some countries, such as Italy, having no spreads predicting anything significantly. The funny thing is that I was expecting Japan to be that case, and it turns out to be the one for which more spreads are predictive significantly than for any other nation in this set. Curious.

      1. Moses Herzog

        @ Ivan
        Damn man, I don’t even find Claudia Sahm dis-likeable in this substack post. Is she on the good part of her bipolar spectrum ??

  6. Moses Herzog

    I was going to say something about this I thought was a tad humorous. But I kinda have a personal rule or a personal code, if someone is trying to learn something you don’t poke fun. So, I’ll try to follow my own rules and leave it there.

  7. Willie

    I just use the magic dowsing stick, augmented by the McBride recession watch filter. McBride is kinda sorta on recession watch. That’s usually a bad sign if you don’t want a recession. My take is that we will have a dip, but it may not quite get to full recessionary depth. Certain sectors will suffer, no doubt. I don’t think it is supply chain problems as much any more, but there are still problems beyond that. The inflation spiral seems to be de-spiraling pretty fast all of a sudden, at least around here. Food is still up quite a bit, but fuel has plummeted. The number of new unemployment claims is consistent with a strong economy, not a recessionary economy.

    As far as the job numbers, I also wonder, without proof, whether any lack of job growth is just a lack of available people to hire. I know my company struggles to find people who are both qualified and available. And interested. We would hire a number of people if we could find them.

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