A study from the Federal Reserve Bank of San Francisco suggests that consumer sentiment and the tone of news coverage can predict economic downturns nearly as effectively as traditional economic data. Released on July 17, the working paper, titled "Do Vibes Predict Recessions?", was authored by economists including Nicolas Petrosky-Nadeau, Yeji Sung, and Daniel J. Wilson.
The researchers found that a model based solely on sentiment outperformed one based on hard data when predicting recessions one month ahead. This sentiment model was quicker to identify rising recession risks, although it also generated more false alarms.
The study emphasizes that while soft data is not a replacement for hard statistics, it serves as a valuable complement, capturing information that may later appear in traditional economic reports.
The analysis utilized various sentiment indicators, including consumer surveys from the University of Michigan and an economic-policy uncertainty index. For those in Denton, Texas, this study provides insight into how collective mood can influence economic forecasts. However, the authors caution that their findings reflect personal views and do not represent the official stance of the Federal Reserve.
