This paper examines the relationship between credit spreads and economic activity, constructing a credit spread index based on corporate bond prices. The GZ credit spread index, derived from a large dataset of corporate bonds, is shown to be a robust predictor of economic activity at both short and long-term horizons. The index is decomposed into two components: one capturing expected defaults and the other, the excess bond premium, which reflects the price of default risk rather than the risk of default. The results indicate that movements in the excess bond premium are the primary driver of the predictive power of credit spreads for economic activity. Innovations in the excess bond premium that are orthogonal to the current state of the economy lead to significant declines in economic activity and equity prices. The paper also shows that a deterioration in the creditworthiness of broker-dealers increases the excess bond premium, reflecting a reduction in the effective risk-bearing capacity of the financial sector and a contraction in credit supply. The findings support the notion that an increase in the excess bond premium has adverse consequences for the macroeconomy. The paper also examines the macroeconomic implications of the excess bond premium using a VAR framework, showing that shocks to the excess bond premium lead to significant declines in consumption, investment, output, and disinflation. The results are consistent with the financial accelerator mechanisms, indicating that reduced credit availability has significant adverse consequences for macroeconomic outcomes. The paper also shows that the excess bond premium is a significant predictor of economic activity, with significant increases during financial crises. The findings suggest that the excess bond premium reflects variation in the pricing of default risk rather than variation in the risk of default. The paper concludes that the excess bond premium is a key indicator of financial conditions and has significant implications for economic activity.This paper examines the relationship between credit spreads and economic activity, constructing a credit spread index based on corporate bond prices. The GZ credit spread index, derived from a large dataset of corporate bonds, is shown to be a robust predictor of economic activity at both short and long-term horizons. The index is decomposed into two components: one capturing expected defaults and the other, the excess bond premium, which reflects the price of default risk rather than the risk of default. The results indicate that movements in the excess bond premium are the primary driver of the predictive power of credit spreads for economic activity. Innovations in the excess bond premium that are orthogonal to the current state of the economy lead to significant declines in economic activity and equity prices. The paper also shows that a deterioration in the creditworthiness of broker-dealers increases the excess bond premium, reflecting a reduction in the effective risk-bearing capacity of the financial sector and a contraction in credit supply. The findings support the notion that an increase in the excess bond premium has adverse consequences for the macroeconomy. The paper also examines the macroeconomic implications of the excess bond premium using a VAR framework, showing that shocks to the excess bond premium lead to significant declines in consumption, investment, output, and disinflation. The results are consistent with the financial accelerator mechanisms, indicating that reduced credit availability has significant adverse consequences for macroeconomic outcomes. The paper also shows that the excess bond premium is a significant predictor of economic activity, with significant increases during financial crises. The findings suggest that the excess bond premium reflects variation in the pricing of default risk rather than variation in the risk of default. The paper concludes that the excess bond premium is a key indicator of financial conditions and has significant implications for economic activity.