Economic sentiment surveys are carried out by all European Union member states and are often seen as early indicators for future economic developments. Based on these surveys, the European Commission constructs an aggregate European Economic Sentiment Indicator (ESI). This paper compares the ESI with more sophisticated aggregation schemes based on statistical methods: dynamic factor analysis and partial least squares. The indicator based on partial least squares clearly outperforms the other two indicators in terms of comovement with economic activity. In terms of forecast ability, the ESI, constructed in a rather ad hoc way, can compete with the other indicators.

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Keywords Europe, economic sentiment indicators, economic sentiment surveys
JEL Time-Series Models; Dynamic Quantile Regressions (jel C22), Forecasting and Other Model Applications (jel C53)
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Journal Oxford Bulletin of Economics and Statistics
Gelper, S.E.C, & Croux, C. (2010). On the Construction of the European Economic Sentiment Indicator. Oxford Bulletin of Economics and Statistics, 72(1), 47–62. doi:10.1111/j.1468-0084.2009.00574.x