The R-Index

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. Macroeconomic indicators such as GDP, employment, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise. Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

R-Index helps determine the intensity of recession. Its big advantage is that it is instantly available, unlike official statistics. The Recession Index (R-Index) is formulated based on the conversations on recession and economy in social media. The R-Index is reliable at spotting economic turning-points by tracking the conversations in blogs, forums, and social networks. More number of mentions of recession is considered as a bad economic condition and vice versa. The intention behind this is to explain that R-Index can also be shown using social media conversations on recession. The index has the advantage of being timely: data from the articles is available immediately. Using this basic form of text analytics on the social media contents, it is possible to offer interesting insights into macro-economic data that has yet to be released. The index has inspired serious research into testing whether the tone and volume of economic reporting over time has affected people’s perceptions.

Fig1. R-Index from January – April 2012

Q1 2012 has been a period of recession in the R-Index based on social media recession conversations. Growth has slowed and major economies have failed to loosen the tight grip of recession. Economies like Britain, Greece and Spain are in double dip recession, and steps like austerity drives, increased taxation and spending cuts have failed to curb the situation.

The index started with negative tendency in the beginning of the quarter, reporting a number of big economies falling back to recession, but in the later stages the trend in the r-index fell due to positive growth in Germany and France. However, April brought a change in the weather. Increased taxation and tough austerity measures put UK back in a double dip recession and the apex bank of Spain warned further slump in GDP and jobs in Spain. Greece is in even poorer shape as the debt ratio is rising and its banks have been cut off from capital markets. The government in Athens must negate the burden on its people as much as possible in its budge of self-protection.

In social media, stories go viral. Virality is the number of people who have created a story from your post as a percentage of the number of people who have seen it. Below are some stories which went viral on twitter:

To make the index much more effective, sentiment of recession were also considered. E.g. in social media conversation, if a blogger posts that recession hasn’t affected him or prevented him from making purchases, then it is considered as a positive sentiment and anybody expressing his concern over recession as being a major threat to his job is a negative sentiment, and the factual statements and news being shared in the blogs, discussion forums et al are considered as neutral bias.

Fig2. Evidence of Sentiment plot for US from Jan – April 2012 Along With the R-Index

Growth is slow, but it is still there. Slow US economic growth coupled with uncertainty in Europe will contribute to short-term instability on Wall Street, according to Tom Villalta of the Jones-Villalta Opportunity Fund.

Germany, however, is surrounded by optimism as the government predicts that Germany will skip recession, record double growth next year and remain as the growth motor in Europe. Unemployment is expected to drop to 6.7% this year and to a new record low of 6.5% in 2013. For almost all economists, France experienced a recession since late 2011. According to them, this slump is only temporary, until the middle of the year.

Despite fears of another recessionary dip, worldwide manufacturing continues to perform well, recently posting strong quarterly gains in major economies. South Africa proved its pliability and manufacturing potential by competing on this global platform. This continued persistence of global manufacturing indicates that a worldwide downturn in industrial production will hold its position dependent on the outcome of the Euro-zone crisis.

- by Vinay Kumar