Credit Indicators as Predictors of Economic Activity: A Real‐Time VAR Analysis

Using readily available indicators of the profitability, price, and availability of credit—the term spread, junk‐bond spread, and banks’ “willingness to lend” as reported by the Federal Reserve—we show that it is possible to significantly improve on the real‐time output and employment predictions of forecasting professionals at the medium‐run horizons that are most relevant to policymakers and private decision makers. Key to this improvement is a flexible state–space model of data revisions. The willingness‐to‐lend variable is the best real‐time predictor of GDP growth. For forecasting job growth, all three credit indicators prove helpful.