The role of news in economic predictions1 min read . Updated: 08 Dec 2020, 10:02 AM IST
- A study of 22.5 million Dow Jones news articles finds that business news can give better predictions of consumption trends than hard economic data.
Business news gives useful insights that can help forecast a country’s macroeconomic performance. Are news-based forecasts any better than predictions made using hard statistics? A new study finds that in the short run, business news is more effective than traditional data at predicting consumption trends in an economy.
In their working paper, researcher Jon Ellingsen and others from BI Norwegian Business School have converted the text of 22.5 million news articles from the Dow Jones Archives into a monthly time series data covering 80 topics such as finance, health and trade. This makes up news-based data in the study.
They compare this with the predictions extracted from hard statistics in the widely used FRED-MD dataset, which contains monthly data of over 100 macroeconomic indicators from the US.
The study assesses the extent to which these predictions—news-based and data-based—matched the reality across three variables: consumption, investment and gross domestic product (GDP). The study covers the period of January 1985 to April 2020.
The authors find that the news-based predictions boast of information not captured by hard stats, and also have a much higher frequency. Signals of economic trends derived from the news gave better predictions on consumption trends. But when it comes to predicting investment trends, hard statistics take the lead.
On GDP predictions, the researchers do not find much significant difference between the two datasets.
However, the news-based predictions are found to be relatively short-lived. This can be explained by the low shelf life of the news, since the media mostly reports on newsworthy events and stories that are time-sensitive.
But this low shelf life of news has its own advantages. In the times of economic tragedies, such as the Great Recession, news-based predictions tend to improve upon predictions made by hard stats, the study finds.
(Snap Fact features new and interesting reads from the world of research.)