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Newspapers Can Predict the Economy Better than Confidence Indexes

News article and editorial textual analysis often beats standard sentiment surveys
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The phrase "news you can use" is taking on a whole new meaning. 

Textual analysis of articles and editorials about the economy can be scrutinized to track current economic conditions pretty well: so well, in fact, that they often beat standard consumer sentiment surveys as forecasting tools. That's the finding in a new Federal Reserve Bank of San Francisco study, which leads today's economic research wrap. We also take a look at common inequality misconceptions, the link between unemployment and depression, and GDP measurement in a digital age. 

Check this column every Tuesday for new and interesting studies from around the globe. 

Economic momentum: read all about it

San Francisco Fed research advisers Adam Hale Shapiro and Daniel J. Wilson and co-author Moritz Sudhof have come up with a technique for tracing economic sentiment in newspaper articles based on textual analysis. Even better, it seems to work. The researchers applied their method to financial news articles published from January 1980 to April 2015, and in most cases, the news sentiment indexes proved better at predicting economic activity than consumer sentiment measures in head-to-head comparisons.

"These methods of sentiment text analysis hold great promise for improving our understanding of news sentiment shocks and how they affect the economy," they write. 

What’s in the News? A New Economic Indicator
Published April 10, 2017
Available at the San Francisco Fed website 

Inequality: a field guide

Top incomes have been climbing, no doubt, but University of Minnesota economist Fatih Guvenen and University of Chicago's Greg Kaplan have a few caveats for anyone who cares about the widening gap between those at the top of the pay scale and those at the bottom. Point one: how  you define "income" really matters. If you include income accruing to partnerships and certain types of corporations, top earners' share of the pie has been growing over the 2001 to 2012 period. If you don't, the increase disappears. That's relevant, because it isn't clear how much of that pass-through income reflects a genuine increase in pay.

Point two: how you define "top" is also crucial. Almost all of the post-2000 increase in the top 1 percent income share is due to an rise in the income of the top 0.01 percent income share. Basically, people who made $7.2 million or more in 2012 have been getting comparatively richer, but people who make $1.55 million—the 99.9th percentile—haven't been pulling ahead so much. To put that into perspective, only about 12,000 households in the entire economy fell into the 99.99th percentile club, so we're talking about a tiny group making major gains.   


Finally, the rising divide isn't entirely due to a few people becoming super-rich. "Stagnation of incomes in the bottom percentiles plays an important role in explaining the growth in top income shares," the authors write. 

Top Income Inequality in the 21st Century: Some Cautionary Notes
Published April 2017
Available on the NBER website

Unemployment and mental health

Job loss is never fun, but new research shows that it's literally depressing. Economic inactivity can spur severe depressive symptoms, and they're more likely in individuals who have been out of work for a while, based on a new analysis of Australian labor data. What's worse, there's a glum cycle:  severe depressive symptoms lead to economic inactivity. "Our results show larger effects for men than women, indicating that men’s mental health is more closely tied to their employment outcomes than is women’s," the authors write. "Further, men seem to be more responsive to the shock of a bad event." 

The Bilateral Relationship between Depressive Symptoms and Employment Status
Published March 2017
Available on the IZA Institute of Labor Economics website

Is GDP the right number to watch? 

Gross domestic product growth has been falling, but we've got all of these cool new technologies: phones that connect us to the world, social media apps, baby animal GIFs... the list goes on. Economists have puzzled over the disconnect. 

According to new research by University of Maryland's Charles Hulten and the Philadelphia Fed's Leonard Nakamura, slower growth in output might be consistent with the big tech improvements. Innovation might be causing "costless improvements," or quality gains that don't result in higher prices, but allow consumers to use each dollar more efficiently. As a result, "living standards can be rising at a greater rate than is signaled by the growth rate of real GDP." 

Still, don't abandon traditional growth stats just yet. "While GDP may not be sufficient for fully characterizing economic growth in the age of the internet, it remains an essential tool for understanding the evolution of the market economy," they write. Plus, we don't have a perfect alternative. "The unmeasured output‐saving value of information alone is potentially very large, and it has grown rapidly in recent years. How much is yet to be determined." 

Accounting for Growth in the Age of the Internet: The Importance of Output-Saving Technical
Published April 2017 
Available on the NBER website

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