Tuesday, February 19, 2013

Media Bias and Economic Pessimism

Earlier this week during a discussion of Walmart's recent sales numbers I was asked to explain what, "Consumers tend to react to the downside more aggressively and more quickly than the upside." meant. I explained that, simply put, people reduce their spending more quickly and in greater amounts when they feel times are difficult than they increase spending when times are favorable. Unsurprisingly, people's current actions reflect their beliefs regarding the future.

If you're a viewer of cnbc, bloomberg or another financial news channel you're likely familiar with this idea in the form of "consumer confidence." The Conference Board polls five thousand households monthly to establish their opinions on both current and future economic conditions. These opinions are used to craft the CCI, Consumer Confidence Index, which is believed to be an important economic indicator.

There is little disagreement that the CCI represents important insight on consumer behavior. In no way do I feel that it is inaccurate or unimportant. When consumers feel financially uncertain they spend less. When  they feel secure they increase spending. These facts are well established and directly linked to the CCI. However, I do feel a bit uneasy when it comes to the basis of the index.  After all, if the survey is simply the opinions of five thousand average households I have to wonder how those opinions are formed.

There's a few different ways individuals could establish their opinions regarding personal economic outlook.  Obviously personal experience is a leading contributor. Someone who has just been laid off or had their hours reduced is likely going to feel that the future is uncertain.  Anecdotes from friends and family are also likely to be very influential. If your brother John tells you that his company is looking to fire six thousand workers you're likely to wonder if things aren't going well. Of course if you're interested in economic news you may even be reading monthly economic reports which directly tell of growth and unemployment rates. I suspect that's a rather small minority however.

For the majority what's forming our opinion of economic outlook? Undoubtedly it must be media coverage of the economy. If the CCI is a measure of our collective opinions, and our opinions are heavily influenced by the media, the question of "is the media fairly representing the economy" is obvious. The answer is resounding no (See Economic Affairs, Media Coverage, and the Public's Perception of the Economy in Germany.)

This paper written by Marcel Garz sought to examine the connection between German media coverage of unemployment rates, public perception of unemployment rates, and actual changes in unemployment. Garz found that positive and negative news coverage of the economy had relatively equal effects on public perception on a per story basis. However, negative news stories were far more prevalent overall, and thus led to economic pessimism. In Garz's words,

"The results, which are robust over time and across demographic groups, suggest that a
single negative report has a long-run eﬀect that is similar to the inﬂuence of a positive
report, but their higher numbers relative to positive reports causes an asymmetric reaction
in unemployment expectations."

It is important to note that over the course of this study unemployment actually declined by nearly two percent. Thus, the negative reporting was not due to particularly difficult economic times.

If this data is accurate (and many studies would suggest it is) then it's difficult to come to a conclusion besides negative economic news reporting is damaging to the economy. The previous statement in no way implies that media outlets should not honestly report economic troubles. It is simply a statement of objective fact. Further, given the nature of news television it is unsurprising that an overly pessimistic economic outlook prevails. The public is simply less likely to pay attention to a news anchor who claims everything is going well than a news anchor who presents a grim and cautionary outlook.

As unfortunate as the situation is there is no easy remedy. Freedom of the press is far more important than a phenomenon that while damaging to our economy is also at worst a minor contributor. Still, it would be nice if the media painted a more accurate portrayal of the current economic outlook.

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