The state and trends of the sentiment in the economic debate can be highlighted using Onalytica Indexes.
Onalytica Indexes is a collection of indexes which tracks how online media report on a range of economic and business issues.
Over the years an increasing amount of research has been done into how media reporting can be used as indicators for the state of the economy. Other research has highlighted that the way economic news is reported can explain why consumer sentiment sometimes departs from economic fundamentals.
Onalytica Indexes shares the same basic ideas as these examples; that the level and change in the attention an issue receives in the public debate can increasingly be transformed into an indicator of economic trends.
In practice this is done by continuously collecting a large sample of what is published online about, in this case, the Eurozone economy. The Inflation-Index then measures the amount of articles that make references to what can be interpreted as inflationary issues. This includes the word “inflation” itself, references to increasing prices, that goods and services are becoming more expensive, and so on.
Figure 1 (below) shows the Onalytica Recession-Index for the UK Economy. Notice the sharp and accelerating increase since the low-point in July 2011.
The Recession-Index shown in Figure 1 uses equal weight for all voices. This weighting usually makes the results correlate well with what a popular poll would show.
The interpretation of the graph is thus that the population in general thinks that there is a higher chance of a recession in the UK Economy than they have thought at any time since April 2010.
Figure 2 (below) also shows the Recession- Index, but here all voices are weighted according to their calculated influence on the topic “UK Economy”. This means that national media, influential economists and similar are weighted more than, say a personal blog.
One way of interpreting Figure 2 is that among this group of stakeholders there has also been an increasing expectation (or fear) of a recession in the UK Economy since June, but the increase seems less dramatic.
Comparing Figure 1 and Figure 2 it is clear that “the average person” regards the chance of a recession as higher; both groups regard the chances as dramatically increased since July of 2011.
Clearly, if the government was hoping that consumers were going to feel more optimistic and start spending more, the data seems to be disappointing.
Another example of how the economic sentiment can be better understood using this type of analysis is shown in Figure 3.
Figure 3 (below) shows the Onalytica Crisis-Index for the Euro Zone since April 2010. Clearly the view that a crisis is becoming more likely has been increasing since late April 2011 and although it seems to have dropped slightly in the last three weeks it will be very interesting to follow this index going forward.
A final example shows how combining indices can be very powerful.
Figure 4 (below) shows the Onalytica Recession-Index and Onalytica Inflation-Index for the US Economy since April 2010.
The Recession-Index is used as an indicator of the collective sentiment and indicates that the economy is likely to decline.
As Inflation is a key focus of a growing economy an increase in the Inflation-Index can be interpreted as an expectation of economic growth.
The idea is not that these Indexes should necessarily predict the underlying economic data, but show how the public in general (the equal weighted version) and those with more influence (the influence weighted version) perceive the economy.
I haven’t tested the indexes in Figure 4 against actual GDP or Inflation figures so I can’t comment on those correlations. I have tested them against the S&P500 Index and that looks impressive.
Earlier this week I looked at the use of the word ‘recession’ in the context of the UK economy. Following the downgrade of the US debt I had a similar look at the debate on the US economy.
The first chart shows the share of online mentions that use the word ‘recession’ in relation to the US economy.
It is clear that there has been a substantial increase in the index since March and that the level in August has surpassed the previous peak of August last year.
But while the mentions of Ben Bernanke seemed to correlate well with the mentions of recession last year, the story is different this time. Notice how the focus on Bernanke has gone down in July and August when the focus on ‘recession’ has gone up.
The explanation might be that the problems this time around are more centred on political issues or the inability of politicians to deal with the issues.
The second chart seems to indicate that this time there is a better correlation between the mentions of ‘politicians’ and ‘recession’ than ‘Bernanke’ and ‘recession’.
Note: The charts are adjusted for the measured influence each “voice” has in the debate on the US economy. For example, compared with the New York Times (the most influential), FT weighs in with 59%, Guardian with 43% and the blog Seeking Alpha with 15%