Nowcasting the euro area with social media data

TL;DR

This paper demonstrates that large language models analyzing Reddit social media data can improve daily nowcasting of inflation and unemployment in the euro area, especially during unusual periods like COVID-19.

Contribution

It introduces a novel method using AI and social media signals for real-time economic indicator nowcasting in Europe.

Findings

Outperforms traditional sentiment and financial indicators in accuracy

Provides useful daily signals during COVID-19 and post-pandemic periods

Enhances economic forecasting toolkit with social media analysis

Abstract

Using a state-of-the-art large language model, we extract forward-looking and context-sensitive signals related to inflation and unemployment in the euro area from millions of Reddit submissions and comments. We develop daily indicators that incorporate, in addition to posts, the social interaction among users. Our empirical results show consistent gains in out-of-sample nowcasting accuracy relative to daily newspaper sentiment and financial variables, especially in unusual times such as the (post-)COVID-19 period. We conclude that the application of AI tools to the analysis of social media, specifically Reddit, provides useful signals about inflation and unemployment in Europe at daily frequency and constitutes a useful addition to the toolkit available to economic forecasters and nowcasters.