A study from the Federal Reserve has found that consumer sentiment and the overall tone of news can forecast recessions similarly to traditional economic indicators like jobs and prices. Conducted by economists from the Federal Reserve Bank of San Francisco, the research was published on July 17 and is titled "Do Vibes Predict Recessions?"
The findings suggest that sentiment models can sometimes outperform hard data in predicting economic downturns. Specifically, a model based solely on consumer sentiment showed greater accuracy in predicting recessions one month in advance compared to models reliant solely on hard data. While the sentiment model identified a higher number of months leading into recessions, it also generated more false alarms.
The authors emphasize that sentiment data serves as a complement to hard statistics, providing valuable insights into recession risks. The study analyzed data from August 1999 to May 2026, covering three recessions, using inputs such as consumer surveys and an economic-policy uncertainty index.
For both households and businesses, this research offers reassurance that collective economic sentiment is meaningful. However, the authors note that the paper reflects their views and does not represent the official stance of the Federal Reserve, and it assesses the predictive capacity of sentiment rather than forecasting an impending recession.
