Forecasting Economic Growth: Evidence from housing, banking, and credit conditions

Abstract

Previous studies on economic growth have separately examined the role of housing, banking, and credit market conditions, despite their interrelatedness. Therefore, this paper comprehensively investigates the relative importance of four indicators [house prices, residential investment, corporate credit spreads, and aggregate bank liquidity creation (LC)] to forecast U.S. real GDP growth. We do so after accounting for a comprehensive set of other predictors and aim to identify indicators that better forecast economic growth. Our in-and out-of-sample results show that house prices and corporate credit spreads predict real GDP growth better than residential investment and LC. Moreover, shocks to house prices and corporate credit spreads have a greater impact on real GDP growth and other macroeconomic indicators than shocks to LC and residential investment. Furthermore, house prices have the largest positive impact on inflation and the largest negative effect on unemployment. These results may have potential monetary policy implications.