A study from the Federal Reserve Bank of San Francisco reveals that consumer sentiment and the tone of news can predict recessions as effectively as traditional economic data. Released on July 17, the paper titled "Do Vibes Predict Recessions?" was authored by economists Nicolas Petrosky-Nadeau, Yeji Sung, and Daniel J. Wilson.
The researchers found that models based solely on sentiment outperformed those relying on hard data when predicting economic downturns one month in advance. While sentiment models identified more months leading up to past recessions, they also generated more false alarms. The study emphasizes that soft data complements hard statistics, providing valuable insights into recession risks.
The analysis, which spans from August 1999 through May 2026 and includes data from three recessions, utilized various sentiment indicators such as the University of Michigan consumer surveys and the San Francisco Fed's Daily News Sentiment Index. The findings suggest that understanding consumer mood can be beneficial for households and businesses as they navigate economic uncertainties.
However, the authors note that the paper reflects their views and not the Fed's official stance, and it does not predict an impending recession.
