*Editor's note: This article was originally published on February 3, 2019, by Menzie Chinn **here**.*

It's kind of limiting to look only at recessions as predicted by the yield curve. What about growth?

I run regressions of 4-quarter GDP growth (in log terms) as a function of one-year lagged 10 year-3 month Treasury spread, the spread augmented by one-year lagged economic policy uncertainty (EPU, from Baker, Bloom and Davis), and spread augmented by EPU and contemporaneous 4-quarter growth in potential GDP.

Notice all forecasts suggest declining growth rates going forward - although the simple yield curve model predicts the least decline and has the lowest R-squared at 2% over the 1986-2018Q3 period.

The yield curve augmented with economic policy uncertainty has greater explanatory power - R-squared of 8%. And this specification incorporating the estimated growth rate of potential GDP had an R-squared of 33%. Interestingly, these last two models forecast the same y/y growth rate in 2019Q4: 1.5%

All of these forecasts are accompanied by large prediction errors. Figure 2 shows the forecast from the yield curve EPU augmented model, and the 60% prediction interval (+/- 1 standard error). Notice the prediction interval encompasses negative values.

Many permutations are possible, including an estimate of the term premium, allowing a level term from the yield curve, and including a credit risk term. All this is just illustrative of what kind of slowdowns are implied by the standard model, and that incorporating one measure of economic policy uncertainty.

**Editor's Note:** The summary bullets for this article were chosen by Seeking Alpha editors.