For decades economists have analyzed the behavior of various economic indicators during the business cycle. Employment is commonly seen as one of the lagging indicators for the state of the economy. However, there is a leading indicator for the labor sector that coincides with changes in credit spreads. For example, for most of the time since 1968 there has been a close relationship between credit spreads and the index of help-wanted advertising.
Falling demand for work force usually coincides with widening credit spreads, indicating falling profits in the corporate sector. Cost-cutting and restructuring measures are typically undertaken in this phase of the economic cycle. So far, we have examined the impact of several of the most closely watched indicators for the overall state of the economy on corporate bond spreads. Arguably, only monetary policy and market indicators like the slope of the yield curve are true leading indicators for the performance of credit markets. When the GDP figures are published, the credit markets usually have anticipated what the outcome will be. Accordingly, employment is not only a lagging indicator for economic performance, but also at best a coinciding indicator for credit spreads.