A recent study from the Federal Reserve suggests that consumer sentiment and the overall tone of news can predict economic recessions nearly as effectively as traditional economic indicators. This research, conducted by economists from the Federal Reserve Bank of San Francisco, examined whether soft data, like consumer sentiment and news tone, could serve as reliable recession indicators alongside hard data such as jobs and prices.
The findings, released in a working paper titled "Do Vibes Predict Recessions?" on July 17, indicate that sentiment models can sometimes outperform hard data models when forecasting recessions one month in advance. While these sentiment models identified a greater proportion of months leading up to previous downturns, they also generated more false alarms.
The researchers emphasize that soft data should not replace hard data but rather complement it. Their analysis, which spanned from August 1999 to May 2026 and included three recessions, utilized various sentiment measures, including consumer surveys and economic-policy uncertainty indices.
For residents and businesses in Plano, this study provides insight into how collective sentiment can influence economic forecasts. However, the authors caution that the paper reflects their views and does not represent the official stance of the Federal Reserve.
