R-Word Index, Google Trends And Gold

Everyone is discussing recession right now. But how much do they actually chatter about it? Does this talk reflect or change people's perception? And the key question is: can the world-related indices predict the recession? Are they useful for the precious metals investors?

It turns out that yes! At least to some extent. Let's start with the R-word index created by The Economist. It counts how many stories in The Washington Post and The New York Times are using the word "recession" in a quarter. The idea behind the indicator is that economic downturn coincides with a surge in the frequency of the that scary world starting with R. The index surges when recessions are on the minds of people and the financial journalists who write articles about them. And, indeed, it has been pretty good at spotting economic turning points over the past three decades. As one sees in the figure below, the R-word index signaled the start of recessions in America in 1990, 2001, and 2007.

Chart 1: The Economist's R-word Index from Q1 1990 to Q4 2018.

Is it a perfect indicator? Of course not! The R-word index is great because it is instantly available. However, it emits a recessionary signal just before the crises, so it is not the best leading indicator. And it sent a false warning in 1998. Moreover, the size of the spike in the early 1990s was much higher than during the previous recessions, although they were much more severe.

Another problem is that the gauge sometimes indicates recessions after they officially end, as the journalists go on babbling about the slump even when it's over. This is the main limitation of the index: it does not measure the real economic activity but its perception in just two newspapers (however, Mark Doms and Norman Morin, in a paper "Consumer Sentiment, the Economy, and the News Media", elaborated of The Economist's R-word index, constructing indexes reflecting the number of articles about recession from 30 large newspapers, and they reached similar conclusions). If these two match each other, that's perfect. But the perception can be distorted. Remember that the press loves to shock, as fear sells great.

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