Media and Business Cycles

We construct simple indices based on newspaper mentions of the word ``recession'' and show they are useful coincident and leading indicators of U.S. economic activity. These indices compare favourably, both in-sample and out-of-sample, with other business-cycle predictors. Importantly, finance-specialized newspapers perform better than non-specialized newspapers in forecasting economic activity, seem to move earlier at the margin than non-specialized media, and predict Google searches for the word ``recession''. These findings indicate that different forms of imperfect knowledge (rational inattention, narratives or different expectation formation mechanisms) are important in understanding business cycles