Dow Jones Economic Sentiment Indicator Increases for Fifth Consecutive Month
Increase Runs Counter to Consumer-based Indicators; Rise to 33.6 for July Adds to Longest Improvement Trend in Four Years
Running counter to recently released consumer-based indicators, the Dow Jones Economic Sentiment Indicator (ESI) continued its longest improvement trend in more than four years rising in July to 33.6, up from 31.8 in June. It is the fifth consecutive monthly increase for the indicator and the longest streak of improvement since the ESI rose each month from August to December of 2004.
In contrast, the two leading consumer-based economic indicators both saw decreases in July. The University of Michigan Consumer Sentiment Index fell to 66 in July from 70.8 in June and the Conference Board’s Consumer Confidence Index fell to 46.6 in July from 49.3 in June.
“There are two likely factors for the difference between the ESI and the consumer-based indicators,” said Dow Jones Newswires ‘Money Talks’ columnist Alen Mattich. “First, the ESI analyzes media coverage from the beginning of the month up to the morning of its release so it tends to be a much more timely measure of what is happening in the economy.”
“More importantly,” Mattich said, “because the ESI analyzes media coverage of the economy over the course of an entire month, it captures news of the broader economic trends from a variety of perspectives. Surveys can be influenced by an individual’s personal situation or by the dominant good or bad news of the day the survey is being taken.
“It’s worth noting the ESI has been significantly less volatile than the other sentiment indicators throughout this downturn.”
With the ESI’s steady increase, Mattich sees the economy returning slowly but steadily to growth, perhaps by as soon as the end of the year.
“The steady improvement trend in the ESI suggests the U.S. economy will be out of recession in the fourth quarter of this year, but it’s not quite there yet and remains at risk of a relapse,” Mattich said.
The Dow Jones Economic Sentiment Indicator aims to predict the health of the U.S. economy by analyzing the coverage of 15 major daily newspapers in the U.S. It uses a numerical scale from 0 to 100 to express the balance of sentiment in articles about the economy. The ESI represents one of the most comprehensive and far-reaching examinations of media coverage as an economic indicator. The ESI’s back-testing to 1990 shows that the ESI clearly highlighted the risk that the U.S. economy was sliding into recession in 2001 and 2008 and suggests the indicator can help predict economic turning points as much as seven months in advance of other indicators.
Unlike some other indicators where 50 is a clear break-point between recession and recovery, the ESI needs to be read with reference to longer trends. Based on the ESI’s performance since 1990, previous recoveries have been marked by substantial month-to-month gains, with a jump of three points seeming to be a sign of significant improvement. A drop below 50 marks the point at which there is a clear risk of a slowdown.
The Dow Jones Economic Sentiment Indicator is calculated using a proprietary algorithm through Dow Jones Insight, a media tracking and analysis tool. More information about the Economic Sentiment Indicator and its development is available at http://solutions.dowjones.com/esi .
Dow Jones Insight uses innovative text mining and analytic technologies to help organizations keep informed about relevant issues, news, conversations and trends emerging in mainstream, Web and social media. Dow Jones Insight’s global content collection includes more than 25,000 news and information sources as well as blogs, message boards, and posts from YouTube and Twitter.
Source: Dow Jones