BillHobbs.com is a frequently updated blog of original reporting and commentary by Bill Hobbs, a longtime Nashville journalist and media relations adviser. I am currently serving as communications director for the Tennessee Republican Party, a job I began on Oct. 29, 2007.
At various points in this piece, Business Week economics contributing editor Chris Farrell disputes - and pushes - the notion that it is possible for negative media coverage to drive the economy deeper into a funk.
Farrell tries to absolve the media of responsibility for - or even the ability to - talk the country into a recession, but he's not altogether convincing. In fact, a big chunk of his article focuses on a paper by Yale University economist Robert Shiller, which suggests that the media indeed does have that power.
There's no doubt the discussion about the economy has taken a dark turn lately. And narratives, stories, and metaphors do matter. After all, in a global economy there is so much information (data, rumor, judgment, talk, theories, algorithms, speculations, price movements, and news) that we tend to come up with narratives to make sense of what is going on. "Economists are usually very careful to avoid entering such evidence," writes Robert Shiller, economist at Yale University in his recent paper, Historic Turning Points in Real Estate. "And yet, research by psychologists has found that narrative-based thinking is extremely important in human decision-making."
Of course, there are good reasons for economic pessimism today. Prices in the residential housing market are down sharply and foreclosures are skyrocketing. The job market is deteriorating, and the stock market is downbeat. Oil is trading at record prices (even after adjusting for inflation). Financial institutions have written off billions and billions in loans, with more write-offs coming. Each of these trends affects real people: The homeowner that signed a toxic mortgage now watching the bank foreclose on the house, a worker getting laid off because of Chinese competition, a family forced into austerity to pay the spiraling gasoline, heating oil, and food bill.
Where are the Upbeat Tales?
Nevertheless, a good number of economists still believe the glass remains half full. The federal government's fiscal stimulus is coming. The Federal Reserve Board is aggressively easing interest rates. Exports are flourishing. The agricultural sector is booming. Inventories are well-contained. While the 7% of inflation-adjusted gross domestic product made up by housing and autos declined by nearly 12% over the past year, the segments of the economy that make up the remaining 93% of real gross domestic product rose at a healthy 3.8%, calculates James W. Paulson, chief investment officer at Wells Capital Management. "Sensitivity to signs of economic weakness have been magnified while evidence to the contrary is often ignored," he says.
Think about it. How many dinner table and workplace discussions have you had about the weakening economy, the foreclosed home, the credit-card induced bankruptcy, the corporate downsizing? During those conversations, how many upbeat tales have you offered up?
In his paper on historic turning points, economist Shiller emphasizes how news media stories about people who make stupid mistakes can trigger the end of a boom. "The intensity of the public reaction to the stories of human foolishness was augmented by a feeling that not only were people foolish, but also that in many cases they had been duped, they had been had. The many stories of accounting irregularities and fraud, leading to some heavily-covered trials of corporate executives, intensified these feelings."
The Direction is Down
If that's the case, it isn't hard to imagine that negative economic news can eventually turn into something of a vicious cycle. That seems to be an implication of Consumer Sentiment, the Economy, and the News Media, by Mark Doms of the Federal Reserve Bank of San Francisco and Norman Morin of the Board of Governors of the Federal Reserve System. The scholars delved into how consumers may be influenced not only by the content of the news stories they come across but also by the way the media cover the economy.
For instance, note the authors, the headline "Recession Possible" has a bigger impact than an article entitled "Economic Conference Presents Diverse Views." And for better or worse, we're getting a lot of headlines with the R-word featured prominently - such as this one.
Farrell concludes by saying, "Americans can't talk a strong economy into a weak one. Neither can the press. Only the Federal Reserve can do that."
He's not very convincing.
Take a look around you. Most people have not lost their homes or their jobs. Most businesses are still open, still doing business. Yes, there are problems - high fuel prices, rising food costs, a housing sector that's taken a sub-prime hit. But the overall economy is still growing, a fact not reflected in the news coverage of the economy.
The paper Farrell mentioned, Consumer Sentiment, the Economy, and the News Media, was published in 2004. From the abstract:
The news media affects consumers' perceptions of the economy through three channels. First, the news media conveys the latest economic data and the opinions of professionals to consumers. Second, consumers receive a signal about the economy through the tone and volume of economic reporting. Last, the greater the volume of news about the economy, the greater the likelihood that consumers will update their expectations about the economy. We find evidence that all three of these channels affect consumer sentiment. We derive measures of the tone and volume of economic reporting, building upon the R-word index of The Economist. We find that there are periods when reporting on the economy has not been consistent with actual economic events, especially during the early 1990s. As a consequence, there are times during which consumer sentiment is driven away from what economic fundamentals would suggest.
We also find evidence supporting that consumers update their expectations about the economy much more frequently during periods of high news coverage than in periods of low news coverage; high news coverage of the economy is concentrated during recessions and immediately after recessions, implying that "stickiness" in expectations is countercyclical. Finally, because the model of consumer sentiment is highly nonlinear, month-to-month changes in sentiment are difficult to interpret. For instance, although an increase in the number of articles that mention "recession" typically is associated with a decline in sentiment, under certain conditions it can actually result in an increase in various sentiment indexes.
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