It is no secret that I am quite fascinated by the the idea that social media data might be very useful as early/leading indicators of macroeconomic variables. Said in another way I think that social media activity can be seen as a form of prediction markets.
So recently I have been tracking what Google Trends is saying about the development in searches for different terms that might give an indication about whether we are heading for a recession in the US economy.
Lets start with the world ‘recession’.
The picture is not dramatic and the Google searches for ‘Recession’ clearly is much lower than at the onset of the Great Recession in 2007-8. That said, there has recently been a relatively clear pick up in the ‘recession indicator’ that could indicate that ‘Google searchers’ are increasingly beginning to worry about the US economy entering a recession.
How about the labour market? This is Google searches for ‘Unemployment’.
This is much more alarming – there has been a very steep rise in Google searches for ‘Unemployment’. In fact the rise is more steep than it was in 2008. This certainly is an indication of a very sharp deterioration of US labour market conditions right now.
The question then is whether Google searches have any prediction power and here the evidence is quite clear that, that is indeed the case. At least that is the conclusion in a recent paper – The Predictive Power of Google Searches in Forecasting Unemployment – by Francesco D’Amuri and Juri Marcucci.
The evidence is in – the Fed should re-start QE rather than hike rates
Janet Yellen’s Federal Reserve have been extremely eager to say that inflation would soon rise due to the continued decline in unemployment and has essentially ignored all monetary and market indicators, which for a long time have indicated that monetary conditions should not be tightened as fast as the Fed has signaled.
That in my view is the main reason why US economic activity now is slowing significantly in and paradoxically that will now very likely push up unemployment. In fact if we trust the signals from Google searches then we are in for a significant deterioration in labour market conditions in the US very soon.
So while the Yellen-Fed seems to ignore monetary indicators at least the fact that unemployment might soon shoot up again should tell the Fed that it is time to dramatically change course.
In fact it now seems more likely that we will have a new round of Quantitative Easing in the next couple of quarters rather than more rate hikes. Or at least that is what the Fed should do to avoid another recession.
PPS I seriously thought that Janet Yellen was well-aware of the dangers of repeating the mistakes of 1937. Apparently I was wrong.
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