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Abstract:
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The yield spread has been found to serve as a valuable economic forecasting tool. The research develops autoregressive probit downturn models using the United States yield spread and other regional and macroeconomic variables. This study inspects the predictive power of the United States yield spread on the five largest urban economies in Texas, the four largest metropolitan areas along the Texas-Mexico border, as well as the Texas state economy. The other regional and macroeconomic variables are included in model specifications based on characteristics of the economies being analyzed. Results indicate that a narrowing of the United States yield spread for either country tends to increase the probability of recessions in all the economies analyzed. Decreases in the real value of the peso are found to reduce the likelihood of a recession in border economies and Texas. However, results for west Texas intermediate oil price are mixed and suggest that for some economies when oil prices increase, the probability of a recession increases- which is counter to conventional expectations.
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