Why sentiment surveys don’t tell us much these days
Sentiment indicators have lost their predictive power since the onset of the coronavirus pandemic. Global sentiment used to lead global growth by four months in the pre-crisis period, but it has now turned coincidental. We will soon offer an alternative.
Sha All components of the composite sentiment indicator have lost their predictive power for real activity. It seems that with more typical crises, both businesses and consumers can foresee their changing luck in the market and adjust their plans accordingly. But natural disasters, which the pandemic has proven to be, provide no warning signs.
Judging from the recovery of both sentiment and real activity in China, it seems that sentiment surveys will return to normal and once again provide a signal for real activity, but most Western hemisphere economies aren’t there yet.
The impact of the pandemic on sentiment surveys has further highlighted the value of turning to alternative signals that both the abundance of data and technological advances now provide. One should be cautious, though. However good modern machine-learning techniques are at extracting a signal from volumes of data, they cannot abstract from biases already in the data.
We propose a sentiment indicator based on data-mining the research produced by our 250 highly skilled economists. This indicator will summarize the gist of the research on a weekly basis using all the insights we produce daily.