Yield Curve Continues to Flatten Although Broader Economy Shows Strength

​The spread between ten- and two-year treasuries flattened to its narrowest margin in more than a decade last week, falling as low as 0.19. The yield curve is a major market-driven economic leading indicator. The NY Fed’s reduction in their GDP estimate on Friday may have contributed to the decline. In other news, jobless claims fell slightly, once again showing continued strength of the labor market, and Creighton University released their monthly Mid-America Economic Index for the month of July and their Rural Mainstreet Index for the month of August. Both Creighton indices showed general economic strength but pointed to some concerns, including effects from trade wars. 

• Last week, the spread between ten-year and two-year Treasury yields reduced to 0.22, 0.21, and ended Friday at 0.19, all levels not seen since August of 2007. Traditionally, the yield curve has been a predictor of uncertain economic times ahead. Preceding the seven recessions since the 1970s, the yield curve has inverted (i.e., a negative spread between long-term and short-term yields) six to twenty-four months ahead of the “official start” of the recession. An inverted yield curve occurs when short-term yields are greater than long-term yields.

• The Federal Reserve Bank of New York’s nowcast (economic forecast) of GDP fell last Friday to 1.96% from 2.39% the week before. The NY Fed cited the negative impact of higher than expected manufacturers’ inventories as a reason for the decrease.

 

• Weekly jobless claims fell 2,000 claims to 210,000 for the week ended August 18. The labor market continues to show limited signs of slippage, despite trade tensions continuing to impose commerce restrictions between the U.S. and its global trade partners.

 

• Creighton University released their Mid-America Economic Index for the month of July, moving above growth neutral for the twentieth straight month. The index fell for the second straight month to 57.0 in July from 61.8 in June. Overall, the regional economy continues to expand at a healthy pace with manufacturing growth of 2.6 percent in the region versus 2.3 percent for the U.S. as a whole. However, fitting to the trend in recent months, expanding tariffs and rising interest rates are putting pressure on the broader economy.

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• Creighton also released their Rural Mainstreet Index (RMI) for the month of August, a survey of Midwest community bank CEOs. For the seventh straight month, the index floated above the growth neutral reading of 50.0, climbing to 54.8 from 53.8 in June. According to the RMI, one-half of bank CEOs support the cutting of recently enacted tariffs to reduce expenses for their farm clients. Further, bankers expect farm equipment sales to continue to decline by 7.8 percent over the next 12 months, and one-third of those bankers reported rejecting a higher percentage of farm loan requests.