This paper re-examines the relationship between credit spreads and economic activity by constructing a robust credit spread index based on the prices of outstanding corporate bonds traded in the secondary market. The index, referred to as the "GZ credit spread," is shown to be a strong predictor of economic activity at both short- and longer-term horizons. The authors decompose the GZ credit spread into two components: a predictable component that captures firm-specific information on expected defaults and a residual component, the excess bond premium, which likely reflects variations in the price of default risk rather than the risk of default. The results indicate that the predictive power of credit spreads for economic activity is primarily driven by movements in the excess bond premium. Shocks to the excess bond premium orthogonal to the current economic state lead to significant declines in economic activity and equity prices. The paper also finds that a deterioration in the creditworthiness of broker-dealers, key financial intermediaries, increases the excess bond premium, suggesting a reduction in the effective risk-bearing capacity of the financial sector and a contraction in credit supply, which has adverse macroeconomic consequences.This paper re-examines the relationship between credit spreads and economic activity by constructing a robust credit spread index based on the prices of outstanding corporate bonds traded in the secondary market. The index, referred to as the "GZ credit spread," is shown to be a strong predictor of economic activity at both short- and longer-term horizons. The authors decompose the GZ credit spread into two components: a predictable component that captures firm-specific information on expected defaults and a residual component, the excess bond premium, which likely reflects variations in the price of default risk rather than the risk of default. The results indicate that the predictive power of credit spreads for economic activity is primarily driven by movements in the excess bond premium. Shocks to the excess bond premium orthogonal to the current economic state lead to significant declines in economic activity and equity prices. The paper also finds that a deterioration in the creditworthiness of broker-dealers, key financial intermediaries, increases the excess bond premium, suggesting a reduction in the effective risk-bearing capacity of the financial sector and a contraction in credit supply, which has adverse macroeconomic consequences.