A recent study by the Federal Reserve has revealed that consumer sentiment, along with the tone of news coverage, can forecast recessions comparably to traditional economic indicators like jobs and prices. This research, conducted by economists from the Federal Reserve Bank of San Francisco, suggests that these so-called "vibes" can sometimes provide quicker warnings of economic downturns.
The working paper, titled "Do Vibes Predict Recessions?", was released on July 17 and analyzed various measures of consumer sentiment and economic uncertainty. The findings indicate that a model based solely on sentiment outperformed one based on hard data when predicting recessions one month in advance. Although the sentiment model flagged more potential downturns, it also generated a higher number of false alarms.
The authors emphasize that sentiment data serves as a valuable complement to traditional economic indicators rather than a replacement. They note that these soft data points can provide insights that are not immediately reflected in hard statistics. The study utilized data from August 1999 through May 2026, covering three recessions, and included inputs from consumer surveys and economic indices.
For businesses and households attempting to gauge the economic outlook, this study offers reassurance that collective sentiment is significant. However, the authors caution that their findings reflect their views and do not represent the official stance of the Federal Reserve.
