News Indices can be used to help forecast recessions.
Here, we compare the Smoothed US Recession Probabilities (as taken from the FRED site of the Federal Reserve Bank of St. Louis) to the US News Index. The scale is inverted for the Smoothed US Recession Probabilities such that as the probability of a recession increases, it declines in the chart. In this way, the probability time series should move in-line with the News Index around important recessions.
Chart 1: US News Index versus Smoothed US Recession Probabilities (inverted scale)
The US News Index hits extreme negative levels around the worst of each US recession. It turning up from such depressed levels infers a likely improving situation to come. These inversions roughly coincide with the Smoothed US Recession Probabilities time series making similar inversions. Again, we do not propose that news time series should replace other forms of analysis — instead they should bolster them. It looks like an investor having had access to the US News Index around important economic inversions would have greatly benefited.