  Using a large quarterly macroeconomic dataset for the period 1960-2017, we
document the ability of specific financial ratios from the housing market and
firms' aggregate balance sheets to predict GDP over medium-term horizons in the
United States. A cyclically adjusted house price-to-rent ratio and the
liabilities-to-income ratio of the non-financial non-corporate business sector
provide the best in-sample and out-of-sample predictions of GDP growth over
horizons of one to five years, based on a wide variety of rankings. Small
forecasting models that include these indicators outperform popular
high-dimensional models and forecast combinations. The predictive power of the
two ratios appears strong during both recessions and expansions, stable over
time, and consistent with well-established macro-finance theory.
