Forecasting Economic Activity from Yield Curve Factors

This paper provides clear cut evidence that the slope and curvature factors of the yield curve contain more information about future changes in economic activity than the term spread alone, often used in practice as an indicator of future economic conditions. These two factors constitute independent sources of information about future economic activity, which are offset to each other in term spread regressions. The slope factor has predictive power on future economic activity over longer horizons ahead, compared to the curvature factor. The latter improves the forecasting ability of the term spread over shorter or medium horizons. These results hold for a number of world leading economies