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Economists are increasingly anxious about the flatness of the U.S. yield curve and there's good reason for this. The difference between short-term and longer-term yields – a measure that factors in market consensus regarding future growth and inflation – is reaching levels last seen in 2007 just before the financial crisis. Furthermore, the yield curve is only 120 basis points away from negative territory, an occurrence that has preceded recessions throughout history (a basis point is 1/100th of a percentage point).

Deutsche Bank fixed income analyst Dominic Konstam is particularly concerned about the yield curve's implications for the U.S. economy. In a research report issued Friday, Mr. Konstam writes, "The yield curve is signalling a 60-per-cent chance of recession in the next 12 months in our model. … The last two U.S. recessions were preceded by low 70-per-cent probability readings, which could happen if [the 10-year bond yield falls] another 40 basis points from the current level."

Proving a connection between the yield curve and future U.S. economic growth is not easy (even less so here, since Mr. Konstam did not provide details on his recession probability model). My attempts to link the yield curve to future U.S. consumption, the largest portion of the U.S. economy or real gross domestic product, were inconclusive at best.

Dow Theory, an ancient school of investing developed at the turn of the 20th century and still used for guidance today, may provide an answer to this dilemma. In simple terms, Dow Theory states that the U.S. equity market is in an upward trend when the economically sensitive transportation and industrial sectors are making new highs.

There does appear to be a strong relationship between the steepness of the U.S. yield curve – the 10-year bond yield minus the three-month money market yield – and the year-over-year return on the Dow Jones transportation average index, as the chart below highlights.

The past two months of data on the chart indicate why economists are so concerned about the yield curve. It is flatter than at any time since the financial crisis and currently makes transportation stocks look vulnerable to a pullback.

According to Dow Theory, this has negative implications for equity markets as a whole.

To be clear, Deutsche Bank analysts are not using transportation stocks as part of their increasingly fearful U.S equity forecast – that was all my doing. It is not, however, a big leap in logic to see transport stocks as a decent proxy for U.S. economic growth expectations. Stocks in the index such as railway Union Pacific Corp., FedEx Corp. and logistics firm Ryder System Inc., are among the first to reflect changes in economic momentum.

I wrote previously that the effectiveness of the yield curve as a leading indicator for the S&P 500 as a whole has been declining, likely as a result of the unprecedented intervention in markets by the Federal Reserve. The ability of the yield curve to signal the future of economic growth is, however, not yet in.

Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market.