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Statistical Spectral Content Analysis:
Application to Prediction of Recession Cycle

When Is The Next Recession Due?
Economic recessions are repeating but not periodic events. They always come, but at rather irregular intervals. How can one predict the next one on the horizon?
   
Can NASDAQ Predict Recession?
There is a common wisdom that stock market declines of a significant magnitude signal a recession ahead. But which substantial decline over the last two years was a true recession signal? What was the lead time to the recession onset? Which index is the best predictor?
   
Object “NASDAQ”, Mar ’00 – Sep ‘01
Instead of looking at numbers, we used InfoTame to analyze text data: over 1,000,000 news clips from AP, Reuters, AFP, WTN-TV for the March 2000 - September 2001 period. The histogram shows the number of articles containing the word "NASDAQ" for each month. We then further analyzed these 15,511 documents for the most statistically significant associations for each time period. "Recession" was one of such associations, and here is what we found.
   
InfoTame Predicted Onset of Recession 2001 in Dec 2000
The significance of "Recession" was zero through November 2000. Then it jumped in December 2000 and grew further in January 2001. From other studies based on correlations of significance of a given topic and the real world events, we know that InfoTame mirrors the trends as they unfold out there. The significance values calculated by InfoTame's analytics engine reflect the collective wisdom buried within the 15,511 articles talking about NASDAQ and saying something once in a while about recession. No analyst, or a group of analysts, having read all these articles and news clips, could make sense of how the occasional mention of recession related to the ups and downs of NASDAQ in each of the monthly periods.
InfoTame, however, found that there was something significantly different about the way "recession" was mentioned in the 1,051 articles in Dec 2000 and the 960 documents of Jan 2001, compared to thousands of documents for The Mar-Nov period of 2000, when significance of "recession" was zero.
   
Recession Announced Nov 26 ‘01
Now we know that the US economy entered the recession in the July-Sep '01. So it appears that InfoTame gave the first indication of the recession on the horizon after analysis of over 1,000 documents for Dec 1 - Dec 31, 2000 period. That is, we should have known early in January 2001 that in 6 months we'd enter the first quarter of the next recession.

When we used InfoTame to start with documents containing "Dow Jones" or "S&P" in place of "NASDAQ", InfoTame produced identical results for this data base: the first non-zero significance of recession occurred in Dec 2000 in all cases. As we obtain historical text data going back 20 years or more, we can run InfoTame back in time to determine the average lead time for the recession signal prior to several previous recessions whose onset is very well documented.
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