FRBSF Economic Letter
2004-29; October 22, 2004
Consumer Sentiment and the Media
Policymakers and forecasters
pay close attention to a lot of indicators that help them understand
the economy's current condition and the conditions that are likely
to prevail in the future. One of the key indicators is not a so-called "hard" statistic,
like "Real Gross Private Domestic Investment." Rather,
it is a measure of the mood of consumers, who are a hugely important
part of the economy, accounting for two-thirds of the country's
economic activity. This measure of consumer sentiment has been
of interest over the years for two reasons. First, through it,
consumers may be telling us something about the economy that traditional
economic statistics might be missing. Second, consumers' perceptions
of the economy may influence their spending decisions; for example,
if consumers are filled with angst, then they may reduce their
spending.
As significant as this measure is, there is still little
understanding of how consumers form their impressions about the
economy. One
would expect that it would depend primarily on economic fundamentals,
such as employment growth, the unemployment rate, the stock market,
and gasoline prices. This Economic Letter reports on new research
by Doms and Morin (2004) that explores this question. Their research
finds that, in addition to moving in line with these economic
fundamentals, consumer sentiment also swings in response to the
tone and volume
of economic reporting by the media. Over the past 25 years, there
have been several periods when the tone and volume of economic
reporting pushed consumer sentiment significantly away from what
economic fundamentals would suggest.
Measures of consumer sentiment
 One of the more popular measures of consumer sentiment is the
University of Michigan's Survey of Consumers (SC). The SC samples
about 500 households each month and asks about current and expected
economic conditions. The scope of the questions is broad, ranging
from the respondent's personal economic conditions to his impressions
of the overall business climate. The SC publishes indexes on consumers'
perceptions of current conditions, expected conditions, and an
average of the two, known as the composite index (among others).
Figure 1 plots the time series for the current and expected conditions
measures (the composite index, not shown, lies between these two
series); clearly, both measures can swing quickly and abruptly,
as they did in the summer and fall of 1990 and again in late 2000
and early 2001.
What is surprising is how sentiment varies over
time relative to economic conditions. For instance, the expected
conditions index
fell in the early 1990s, during a relatively mild recession,
to levels close to those seen in the early 1980s, when the recessions
were much more severe. Also, during the most recent downturn,
expected
conditions fell some, but not as much as they did during the
downturn in the early 1990s, which was similar in magnitude and
length.
Understanding why sentiment, especially the expected conditions
index, behaved this way is one of the issues that Doms and Morin
address.
How do consumers form their expectations
about the economy?
Doms and Morin posit that not only are economic fundamentals important
determinants of consumers' perceptions, but so are the tone and
volume of media reporting on the economy. Consumers get information
about economic fundamentals (which include such data as unemployment,
inflation, GDP, developments in financial markets, and gasoline
prices) from personal experiences, including the experiences of
friends and family, and from the media.
However, the perceptions
of 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—specifically, the tone reflects
the language used, and the volume reflects the number of articles
about the economy. In terms of tone, the headline "Recession
Possible" is likely to elicit a greater negative impression
about the economy than an article entitled "Economic Conference
Presents Diverse Views" in which the possibilities of a recession
are discussed in the last paragraph. Misgivings about using the
word "recession" have been expressed over the years,
sometimes tongue-in-cheek; Alfred Kahn, chairman of the Council
of Wage and Price Stability during the Carter administration, went
so far as to substitute the word "banana" for "recession" in
a speech. In terms of volume, seeing ten articles about layoffs—even
though the articles contain similar content—may have a greater
effect on a consumer's perceptions about the economy than seeing
only a single article about layoffs.
Measuring the volume
and tone of reporting
To test whether the tone and volume of reporting affect people's
perceptions, Doms and Morin constructed indexes to measures the
tone and volume of economic reporting over time. The indexes are
based on the number of articles that contain certain keywords and
phrases in the title or first paragraph. For instance, the "recession
index" is based on the number of articles that mention "recession" or "economic
slowdown." The authors scanned articles from thirty of the
largest newspapers across the country. The idea behind the recession
index was borrowed from the "R-Word Index" from The
Economist which counts the number of articles from the Washington
Post and
The New York Times mentioning the word "recession."
The "layoff
index" measures the number of articles that
mention "layoffs," "downsizing," and "job
cuts." One reason for creating such an index is that several
consumer sentiment questions deal specifically with the job market.
Additionally, consumers closely monitor the job market. Doms and
Morin constructed a number of other indexes, as well, but those
seemed to have little bearing on consumers' perceptions of the
economy.
The recession index is shown in Figure 2 and the layoff
index in Figure 3. One of the more stark features of the recession
index
is the size of the spikes in the early 1990s when levels are
higher than those reached in the more severe recessions in the
early 1980s
and much higher than the levels reached during the most recent
recession. The layoff index also has surprising spikes: the index
was much higher in 2001 than in the early 1990s and early 1980s.
By contrast, the actual deterioration in the employment market
was much worse in the early 1980s, when the unemployment rate
reached nearly 10.8%, than during the most recent slowdown, when
the unemployment
rate peaked at 6.3%.
How are the newspaper indexes related to consumer sentiment?
 Doms
and Morin use the recession and layoff indexes to explain the
departure of sentiment from measures of economic fundamentals.
After controlling for economic fundamentals, Doms and Morin
find that the recession and layoff indexes assist in explaining
the
swings in sentiment, especially the downward swings in the
early 1990s and in 2000/2001. To demonstrate the power of the newspaper
indexes on sentiment, Figure 4 plots the estimated contributions
of the newspaper indexes to the expected conditions index for
the early 1990s, a period in which consumer sentiment recorded
low values. The figure shows that there 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.
These results
suggest that consumers pay attention to the media's reporting
of the economy and that perhaps the tone and the volume
of reporting affect consumers' perceptions above and beyond the
facts and opinions being reported. The newspaper indexes also
appear to explain people's feelings about expected conditions a
bit better
than current conditions.
A key question is how long-lived the effects
of the media's tone and volume are on people's perceptions of the
economy. Doms and
Morin find that the newspaper indexes affect sentiment for only
a month or two; after a couple of months, the effects of reporting
are nearly nonexistent. Finally, Doms and Morin also explore more
complex models of news reporting and consumer sentiment. One of
the conclusions they reach is that the news reporting considerably
clouds the understanding of month to month movements in consumer
sentiment. In fact, they show that, under special circumstances,
it is possible that an increase in "bad news" reporting
(as measured by the recession and layoff indexes) may actually
result in a short-term increase in consumer sentiment.
News matters
Doms and Morin show that while consumer sentiment is
affected by economic fundamentals, media reporting also plays
a role. Specifically,
they find that deviations in sentiment from economic fundamentals
are partially explained by constructed indexes of the tone and
volume of news reporting, which may or may not align with what
is happening in the economy. In fact, there are several periods
when reporting on the economy appears to be extreme relative
to economic fundamentals. Consequently, people's views about the
economy
deviate for short periods of time from what economic fundamentals
would suggest. Mark Doms
Senior Economist
Reference
Doms, Mark, and Norman Morin. 2004. "Consumer
Sentiment, the Economy, and the News Media." FRBSF Working
Paper 2004-09.
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