Abstract
This paper examines the relationship between errors in credit spread expectations and key macroeconomic indicators over the period 1948 to 2022. By employing textual analysis on Wall Street Journal title pages, I construct a historical proxy for credit market sentiment, extending the data on credit spread expectations back to 1919. The Survey of Professional Forecasters provides the training data for this model. The analysis reveals that increases in credit spread expectation errors, interpreted as signals of heightened market optimism, are robust predictors of subsequent declines in economic activity. Most saliently, a one-standard deviation increase in forecast errors is associated with a 1.47 percentage point decline in GDP growth, highlighting the significant role of credit market sentiment in driving macroeconomic cycles.
