Tell Me What You Think: Incorporating Insights About Consumer Behavior into Predictions of Economic Activity

Abstract

The vast majority of economic activity prediction models are based on rational choice theory and predominantly only use macroeconomic variables to predict the state of the economy. However, human beings often make "irrational" decisions based on their emotions and general sentiment. In this paper, we develop a Reddit sentiment index and use Google Trends to gauge investor and consumer behavior. We test whether these indicators of individual behavior enhance the predictive accuracy and timeliness of economic activity; in particular, whether such data enhances predictions of national mortgage delinquency rates and identifications of economic regimes. We find that Google Trends is significant in enhancing predictions of mortgage delinquency rates, while Reddit sentiment is significant in predicting changes in economic regimes.