Fed: Media affect economic sentiment

Consumer sentiment about the economy can be swayed by media reporting as well as by economic fundamentals, according to a report by researchers at the San Francisco Federal Reserve Bank.

The results of the study, posted on the Fed's Web site on Friday and dated Oct. 22, found the tone of reporting explains some of the discrepancies between actual economic conditions and consumers' moods.

Economists often keep an eye on consumer sentiment surveys because consumer spending makes up two-thirds of U.S. economic activity. However, in recent years the surveys have proved poor predictors of actual spending patterns.

"While consumer sentiment is affected by economic fundamentals, media reporting also plays a role," the San Francisco Fed report said.

Fed senior economist Mark Doms said what was surprising was that during the 2001 recession, consumers' expectations of the future did not fall as much as they did during the previous recession in the early 1990s, which was similar in magnitude.

And during the early 1990s, measures of sentiment fell to levels close to those seen in the more severe recession of the early 1980s.

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Doms and Norman Morin devised indexes to measure the tone and volume of economic reporting over those periods, drawing on 30 newspapers and counting articles that mentioned "recession," "economic slowdown," "job cuts" and other key words.

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"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," Doms said.

"The results suggest 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," he said.

Several consumer confidence surveys are published in the United States, including one by the Conference Board, a private group, and another produced by the University of Michigan.