Credit impulse
The notion of Credit Impulse was introduced for the first time by Michael Biggs, in “The Impact of Credit on Growth,” Global Macro Issues, November 19, 2008. Instead of focusing on the stock of credit, Biggs indicates it is more important to focus on the flow of credit to understand the business cycle. He argues that since spending is a flow, that is financed through new loans, it should be compared with net new lending – also a flow – rather than credit outstanding – a stock.
Basically, credit impulse represents the flow of new credit from the private sector as percentage of GDP. It tends to lead the economy by 9 to 12 months and it has a high correlation with US final domestic demand and US private fixed investment. Decelerating credit impulse will lead to
slower economic activity and negative credit impulse will produce sharpest slowdowns. Negative credit impulse has a decent track record in prediction recession since it has predicted all the recessions since 1950.