Dow Jones says it can measure economic sentiment by reading the press.

Just as a technological revolution is blowing up newsrooms across the country, Dow Jones has come up with an algorithm
to prove that yesterday's newspapers are useful for more than just fish wrap. According to the publishing giant, you can plumb the language and tone of newspapers to finger turning points in the economy.

The news, it seems, is a moderately reliable economic compass. And today, Dow is quantifying that assertion with the release of its newly minted Economic Sentiment Indicator, a monthly assessment of the "tone" of content in 15 metropolitan dailies. The ESI, informally known as the Optimism Index, is a simple barometer based on a scale of zero to 100—the higher the number, the more upbeat the news and, by extension, the stronger the economy. Dow Jones back-tested the indicator to 1990 and found that it could signal critical turning points in the economy, sometimes a bit earlier than other economic measures.

Does this idea make sense? Consumer sentiment does matter, and lots of people try to measure it. Traders and investors, corporate planners, and government policymakers all take into account consumer sentiment in their planning. The University of Michigan launched the granddaddy of current consumer surveys in 1946 with its Survey of Consumers; the Conference Board introduced the Consumer Confidence Index, which is now a component in the Leading Economic Index, in 1967. But sentiment indicators are far from uniformly reliable, leading Paul Samuelson to quip that "economists have correctly predicted nine of the last five recessions."

So looking to newspapers isn't automatically a less sound methodology for measuring economic sentiment than is already in use and neither is Dow Jones the first to try it. In 1963, London-based Investors Intelligence launched its weekly Advisors' Sentiment Report, which reviews more than 100 independent market newsletters for signs of bearishness, bullishness, or correction. A subscription costs $169 per year, and the tool is a favorite for oil analyst and energy blogger Gregor Macdonald, who finds the element of human judgment in the ASR advantageous. "The best investor sentiment analysis is really more art than science." Back in the '70s and '80s, Macdonald recalls, savvy investors would scan newspaper and magazine headlines to help develop strategies. Today, companies like Yellowbrix use high technology to analyze news sentiment on a daily basis for traders. The Economist tabulates the number of times the word recession appears in the Washington Post and the New York Times to produce its quarterly R-word index.

Dow Jones embarked on its journey to harness its Factiva database of 25,000 sources to serve as an economic indicator after two Federal Reserve economists published a study in 2004 that showed that the greater the velocity of the news coverage, the more likely consumers were to update their sense of how things were. Typically, individuals only update their views on the economy about every six months. A Dow Jones columnist initially tested the Fed theory in December 2007 by analyzing news articles and saw a spike in the number of articles mentioning the word recession, which, he wrote, meant a recession had likely started (and we're still in it). Almost a year later, the National Bureau of Economic Research concurred. Gren Manuel, the DJ European news editor, said the story was doubly noteworthy because back in December 2007, credit markets were seizing up, but most economists were saying that the problem wouldn't spread to the real economy. Ha!