Economic forecasting with evolved confidence indicators

© . This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/We present a machine-learning method for sentiment indicators construction that allows an automated variable selection procedure. By means of genetic programming, we generate country-specific business and consumer confidence indicators for thirteen European economies. The algorithm finds non-linear combinations of qualitative survey expectations that yield estimates of the expected rate of economic growth. Firms’ production expectations and consumers’ expectations to spend on home improvements are the most frequently selected variables – both lagged and contemporaneous. To assess the performance of the proposed approach, we have designed an out-of-sample iterative predictive experiment. We found that forecasts generated with the evolved indicators outperform those obtained with time series models. These results show the potential of the methodology as a predictive tool. Furthermore, the proposed indicators are easy to implement and help to monitor the evolution of the economy, both from demand and supply sides.Peer ReviewedPostprint (author's final draft