Is there a crisis now?
How is the economy really doing right now? Leif Anders Thorsrud`s research has resulted in a completely new tool that helps us answer that question.
Making good financial decisions depends on predictable data that we can trust/rely on. A steady income is an example of what predictable data is for your private economy. But what about the economy of Norwegian companies, or of the state? There are often many variables to consider, and even if you have the statistics and forecasting tools available, it is a challenge in that we rarely have real-time data.
So, what about the stock market? It often reacts almost instantaneously to status quo, and should be a good benchmark? Not according to professor Leif Anders Thorsrud: “The stock market foresees many more downs than what actually happens and is therefore not a reliable source of information on the economy as a whole. Economists can joke about the stock market predicting twelve of the last six economic downturns.
The economic state right now
In order to obtain reliable real-time data, Thorsrud constructed an index model where he compiled data from quarterly GDP growth with text information he received from the news. Thorsrud`s research and insight, was used to develop Financial News Index (FNI), which understands and predicts economic development by using news feeds. News is about what happens right now, and mostly represents the present time. Advanced computer programs find out how much media covers various topics, for example “financing”, “risk” and “interest rate” etc. FNI monitors 20 different topics and combine them with each other. Based on the use and frequency of these topics and combinations FNI can say something about the actual state of the economy, and therefore also predict the future of the economy. The figures are published in collaboration with the media monitoring agency Retriever.
“Utilising news in this way is relatively new in the field of economy. For central bank governors and others who need to make decisions in real time, indices like FNI can be of great value in addition to existing statistics such as GDP, unemployment or financial data”, writes Thorsrud.
The economic state in times of crisis
Supply and demand are the main pillars of the economy. When businesses, states and the world community experience situations that affect one of these two factors, it creates an economic imbalance which results in economic consequences. The corona virus is a frightening example of that. How big the consequences will be, depends on how long this crisis lasts, and how the authorities in each country handle the situation.
Figures from March 31 showed that the financial situation in Norway was already as bad as during the financial crisis and that Norway was in a severe recession. The graph below compares the economic development in the beginning of the oil crisis and the financial crisis with the current situation.
Updated figures from May 5th tells us that the negative development is slowing down, but that the situation is still serious.
With FNI we can see how the crisis affects us right now, and that gives us economic insight at an earlier stage than before. This could help us make the right decisions, faster.
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