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Dow Jones Economic Sentiment Indicator Rebounds
added: 2009-11-03

The Dow Jones Economic Sentiment Indicator (ESI) rose to 36.9 in October, up from 34.1 in September as a result of positive media coverage of ongoing stock market gains and news that the gross domestic product rose at an annual rate of 3.5 percent in the third quarter. The gain in the ESI runs counter to unexpectedly large drops in two leading consumer-based economic indicators.

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. The two leading consumer-based economic indicators, the University of Michigan Consumer Sentiment Index and the Conference Board's Consumer Confidence Index, use national surveys to measure consumer attitudes about the state of the U.S. economy. The Consumer Confidence Index dropped dramatically to 47.7 in October, its second consecutive monthly decline. The Consumer Sentiment Index fell to 69.4 in October after having posted an unexpectedly strong rise in September.

According to Dow Jones Newswires 'Money Talks' columnist Alen Mattich, the divergence in the indicators can be explained by the difference in how the media and consumers view economic news. "Consumers are likely to focus on the continuing bad employment news because of the fear that they could be next," Mattich said. "On the other hand, there was a drop off in coverage of the recession as the media focus on broader positive economic trends such as the stock market's rebound, improved corporate earnings and the growth in the GDP outweighed coverage of mixed or negative news during the month."

The ESI has risen 10 out of 12 months since its low of 22.2 in November 2008, data that confirm the consensus among economists that the U.S. recession ended sometime early in the summer.

"The ESI's strong rise since its lows in November 2008 shows the U.S. economy is clearly getting better, a message confirmed by the big jump in third-quarter GDP," Mattich said. "But the ESI's relatively low level suggests the recovery remains vulnerable to reversal. In the past two cycles, an economic upturn wasn't firmly established until the ESI reached the upper 30s or lower 40s."

Mattich points out that a gain in the ESI historically indicates improvement in the labor market, but significant improvement may still be months away. "In past economic recoveries, increases in the ESI have lead improvements in non-farm payroll by two to five months and improvement in the unemployment rate by five to seven months," Mattich said.

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.


Source: PR Newswire

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