Sentiment About Business Debt as a Leading Economic Indicator

Danilo Leiva-Leon (), Thomas Lubik, Gabriel Perez-Quiros, Nathan Robino, Horacio Sapriza, Francisco Vazquez-Grande and Egon Zakrajšek ()
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Francisco Vazquez-Grande: https://www.federalreserve.gov/econres/francisco-vazquez-grande.htm

Richmond Fed Economic Brief, 2025, vol. 25, issue 09

Abstract: Understanding the sources and transmission of financial distress in the economy is essential for macroeconomic stabilization policy. For example, policymakers and academics have both pointed to excesses in credit markets — including abnormally low risk premiums, misaligned incentives for risk taking, lax credit standards and excessive borrowing — as the main culprits behind the 2008-09 financial crisis.1 Since then, many questions have emerged regarding the role of credit factors in business-cycle fluctuations. Postwar data for multiple economies suggest that rapid growth in business or household credit and in asset prices are reliable predictors of a financial crisis within the next three years,2 and highlight the key role of corporate debt3 and household debt4 in explaining boom-bust cycles, financial crises and slow macroeconomic recoveries. Using a new statistical model, the 2022 article "Introducing the Credit Market Sentiment Index" — co-authored by several writers of this article (Danilo, Gabriel, Horacio, Francisco and Egon) — estimated a factor summarizing conditions in U.S. credit markets and showed that it is strongly associated with business debt. We refer to this factor as the credit market sentiment index (CMSI).

Keywords: business cycles; economic growth (search for similar items in EconPapers)
Date: 2025
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