• by Erik Sass , Staff Writer @eriksass1, April 13, 2017

They may not be in the best financial shape, but newspapers are apparently spot on when it comes to predicting the fortunes of the broader economy. In fact, a textual analysis of newspaper journalism provides a more accurate forecast for economic growth than the oft-cited Consumer Confidence Index published by the Conference Board, according to a study by researchers at the Federal Reserve Bank of San Francisco.

The researchers used software algorithms to analyze the language of 231,000 newspaper articles and editorials about economic matters published by 16 leading newspapers from 1980 to 2015.

They parsed the frequency and position of words and phrases and, with an eye to assessing the underlying sentiments, both positive and negative, of expert sources, as well as journalists.

These measures of sentiment then formed a monthly index which the researchers compared with actual subsequent economic performance, as reflected in data including the S&P 500 index, real personal consumption, nonfarm employment and industrial production.

The sentiment index proved able to predict economic trends up to 12 months ahead. As might be expected, the analysis also revealed major increases in negative sentiment around major events, such as the 9/11 attacks or the collapse of Lehman Brothers.

In a summary of their study, the authors assert: “Newspaper articles and editorials about the economy do more than just report on official data releases. They also often convey how the journalist and those interviewed feel about the economy.” Indeed, they note, “In most cases, the news sentiment indexes have more predictive power than the consumer sentiment measures in head-to-head comparisons.”

One interesting wrinkle in all this is that consumer sentiment has traditionally been based, at least in part, on news reports about the state of the economy, as well as their own personal experiences.

Conversely, as the authors point out, newspaper articles tend to be focused on discrete economic events (for example, a rise in interest rates or a drop in the stock market) while consumers’ views of the economic situation tend to be longer-term and more holistic.