Sentiment Analysis More Timely Than GDP Figures

Gross Domestic Product (GDP) is considered one of the most important economic indicators for "taking the pulse" of the economy. Initially, GDP figures are only available as estimates, which can take years to get finalized. The first estimate of GDP is available about 1 month after the end of each quarter. This is followed by significant successive revisions for up to a year after the initial figure.

To get an early indication of where the economy is going, I find probing financial news to be more effective than using lagging economic indicators like GDP. For starters, news information about publicly traded companies is available in large volumes and in real-time. There are no complicated surveys, bureaucracies, or lag times, the information is processed as soon as it becomes public. By focusing on highly relevant company events in the news and by aggregating its sentiment, I make a move from micro to macro level economics.

The figure below depicts the quarterly changes in GDP and the Market Sentiment Index for the U.S, which shows a positive relationship between them. To test for significance, I consider a linear regression with sentiment being the explanatory variable. Furthermore, I consider whether there might be a lagged relationship between the two.



The analysis confirms a strongly significant positive relationship between US news sentiment and GDP (at a 99.9% level). Furthermore, I find that the strongest relationship is found without applying a lag. An overall R-squared is found to be 0.25 resulting in a correlation of about 50%.

The sentiment index is constructed by probing news facts on more than 7,000 U.S. companies in real-time. It picks up news on layoffs, earnings, management changes, and hundreds of other key events. The data derives from the micro level while the index formulae produce a macro perspective. There are no macroeconomic indicators in the construction of the sentiment index. In contrast, the GDP figures above were available with a lag of at least 4 months. Real-time news sentiment shows promise of being a more timely economic indicator than traditional government GDP figures.