RDP 2020-08: Start Spreading the News: News Sentiment and Economic Activity in Australia 3. Is the News Sentiment Index Useful for Nowcasting?

The news sentiment index clearly moves with fluctuations in economic conditions at a monthly frequency, with sharp declines in economic downturns, such as the early 1990s recession, the 2008–09 global financial crisis (GFC) and the pandemic-led contraction more recently (Figure 2).

The NSI can also be constructed on a daily basis. Because of this, the NSI has the potential to identify turning points in economic activity before other partial indicators, such as survey-based sentiment measures that are available on a monthly basis. For example, based on a (one-sided) 30-day moving average, the NSI was pointing to a sharp drop-off in activity caused by the COVID-19 pandemic in early March, well before the public release of the business survey results at the end of March (Figure 3, bottom panel). Similarly, the one-sided 30-day moving average of the NSI appeared to pick the turning point in economic activity in February 2009, before there were clear signs of a recovery in sentiment based on the business surveys (Figure 3, top panel).[4]

Figure 2: News Sentiment Index
Figure 2: News Sentiment Index

Note: Shaded areas represent the early 1990s recession, the 2008–09 global financial crisis and the COVID-19-led contraction

Sources: Authors' calculations; Dow Jones Factiva

Figure 3: Sentiment Indicators
Figure 3: Sentiment Indicators

Notes: (a) Based on NAB business conditions survey
(b) Thirty-day moving average

Sources: Authors' calculations; Dow Jones Factiva; NAB

Footnote

The NAB survey typically surveys respondents in the last week of the month, so the NSI has the advantage of picking[4] turning points earlier in any given month because of this timing difference. [4]