Now that the Treasury yield curve has flattened substantially from 2014’s very steep configuration, some economists and other impressionable types are worried about a recession in the next 12 months. They are citing the fact that a flat yield curve has heralded each of the previous recessions. However, they have forgotten one of the first things they learned in statistics class—never confuse correlation with causation. In past cycles, flat yield curves emerged after short-term rates moved sharply higher. In turn, they often pushed up bond yields and mortgage rates enough to create a turndown in the housing sector. That is not happening now.
The following table shows how yield curves behaved prior to the past five recessions: