DECEMBER 2004

The Impact of Economic Reporting
on Consumer Attitudes

Consumer spending represents two-thirds of U.S. economic activity. As a major driver of the economic well-being of the country, it is important to understand what factors shape consumers' decisions to spend or not to spend. A new working paper co-authored by Mark Doms and Norman Morin of the Federal Reserve Bank of San Francisco examines the determinants of consumers' perceptions of the economy. In addition to "economic fundamentals" such as employment prospects and trends in prices, Doms and Morin find that media coverage of the economy also influences consumer sentiment and that such reporting has led to instances in which consumer sentiment has been out of sync with economic fundamentals.

The University of Michigan's Survey of Consumers is a monthly survey of 500 households that produces several indices of consumer sentiment, including consumers' perceptions of current and expected economic conditions. Doms and Morin investigate why consumer sentiment, particularly the expected economic conditions index, reacts more and less severely than economic fundamentals would suggest it might. In their analysis, the authors include measures of the "tone and volume of media reporting on the economy" as means by which consumers receive information about economic fundamentals and form expectations about the economy.

Doms and Morin create a "recession index" based on the number of articles in 30 major newspapers nationwide that contain the keywords "recession" or "economic slowdown" and a "layoff index" based on the number of articles that mention "layoffs," "downsizing," and "job cuts." A comparison of the authors' indices with the actual measures of recession and unemployment from 1978 through June of 2003 reveal spikes in the newspaper recession index and layoff index that do not coincide with severe recessions and spikes in the unemployment rate.

The authors estimated the contribution of their newspaper indices to changes in consumer sentiment and found that "[a]fter controlling for economic fundamentals...the recession and layoff indexes assist in explaining the swings in sentiment....[T]here were several months when the newspaper indexes shaved about eight points off the expected conditions index and many more months where sentiment was lowered by a handful of points. Additionally, there were several months in which the newspaper indexes boosted sentiment."

Doms and Morin also report that the newspaper indexes are better at explaining consumers' perceptions of expected conditions than current conditions. They also find that the media effects on perceptions are short-lived, affecting sentiment for one or two months and then all but disappearing.