What is the credit impulse?

The credit impulse, a concept popularized by economist Michael Biggs, measures the change in the flow of new credit to the private sector as a share of GDP. It is essentially the second derivative of credit: not the level of debt, not the growth of debt, but the acceleration or deceleration of debt growth. This seemingly abstract concept is one of the most powerful leading indicators for economic activity because GDP growth is driven by spending, and spending is heavily influenced by the availability and pace of new borrowing.

The intuition is best understood through an example. If businesses borrowed $100 billion last quarter and $120 billion this quarter, the credit impulse is positive because lending is accelerating. Even if they borrow $110 billion next quarter (still a high level), the credit impulse turns negative because the pace of new lending has slowed. This deceleration in credit creation means less new spending is being financed, which will slow economic growth even though credit is still flowing.

Empirically, the credit impulse leads GDP growth by roughly 3 to 9 months across major economies. A positive credit impulse (accelerating lending) tends to precede economic acceleration, while a negative impulse (decelerating lending) precedes slowdowns. The credit impulse turned sharply negative in 2022 and 2023 in many countries as central bank tightening slowed lending growth, which contributed to the manufacturing recession and softening consumer spending observed in subsequent quarters.

For market participants, the credit impulse provides a framework for connecting monetary policy to the real economy. When the Fed raises rates, the credit impulse is the transmission mechanism: higher rates slow loan demand and tighten lending standards, reducing the flow of new credit, which slows spending and GDP growth. Monitoring the credit impulse across countries (the US, China, and Europe are the most important) helps investors anticipate global growth trends months before they appear in official GDP data, providing a valuable edge for positioning in cyclically sensitive assets.