News
Is economic news becoming more negative and does that matter to consumers?
The apparent disconnect between the state of the economy and Americans’ reported perceptions of the economy and their own finances is a persistent enigma of the post-pandemic economic expansion. And in this election year, what many election analysts know about incumbent presidents and their chances of re-election is confusing.
Commentators have offered a range of explanations, ranging from the persistent effects of sharply high inflation, to discontent with the trajectory of social trends and misperceptions about the real state of the economy.
In January, to contribute to this debate, published an essay showing that US economic news coverage, after accounting for changes in the economy, has become systemically more negative over time. In this blog, we update our analysis to include more recent data and discuss potential implications.
Our initial analysis showed that the tone of economic news has become more negative since 2018, with a sharp increase in negativity since 2021. Using the San Francisco Fed’s News Sentiment Index, our central approach was to first estimate the extent to which Economic news sentiment has historically varied based on economic fundamentals (GDP change, inflation change, unemployment and stock price change). We found that from 1988 to 2016, these variables could accurately explain changes in economic news sentiment from mainstream media outlets. We then measure whether news sentiment became, after 2016, more negative than predicted based on post-2016 fundamentals and historical relationships with news sentiment. Our analysis showed that economic news sentiment grew more disconnected from fundamentals and was consistently in a negative direction.
We recently updated the model to include new data and found that the gap narrowed last quarter. That is, while predicted sentiment has been more positive than measured sentiment in every year since 2017 and (in every quarter from Q1 2022 to Q2 2023), we have seen a slight reversal in the last two quarters, in that national economic news was actually slightly more positive than would have been predicted (see chart below). It is too early to determine whether systemic negativity bias has ended.
To understand the magnitude of these negativity gaps, consider how much economic fundamentals would need to deteriorate to close them. Looking at the average difference between 2018 and 2023, the economy would have to be in substantially worse shape for news sentiment to match the state of the economy. Specifically, we would need to see inflation consistently two percentage points higher than it was or GDP growth three percentage points lower for the disparity in sentiment to dissipate.
An additional important question is how systematically negative news sentiment impacts consumer attitudes. A growing body of literature suggests a link between news sentiment and consumer sentiment. For example, Shapiro et al. (2022) found that news sentiment is highly predictive of survey-based disclosures such as the Michigan Consumer Sentiment Index and the Conference Board Consumer Confidence Index. Macaulay and Song (2023) demonstrated that social media users become more pessimistic when exposed to news articles that advance the narrative that a recession is imminent, and that this pessimism can spread to the exposed users’ followers.
There are several complexities in interpreting the growing negativity bias in the news and its impact on consumer attitudes. One is that the direction of causality is not entirely clear. That is, are consumers more negative about the economy because of the news, or do the news report more negative stories to match consumers’ beliefs?
A second complexity concerns the role of households’ inaccurate perceptions of the economy. Most consumer sentiment surveys ask respondents normative questions about how they feel about the economy. For example, the Michigan Consumer Sentiment Index asks exclusively normative statements like “About the big things people buy for their homes – like furniture, refrigerators, stoves, televisions, and things like that, in general, do you think now is a good or bad time for people to buy big things? ?” things from home?” The rarer surveys that instead ask positive questions about the economy can reveal serious inaccuracies in respondents’ macroeconomic perceptions. For example, a Morning Consult Survey conducted in March 2023 revealed that 46% of Americans reported that the US was currently in an economic recession, despite the US economy being in the midst of a third consecutive quarter of healthy growth and the last recession ending almost three years earlier.
A final complexity involves distinguishing how news bias affects household financial decisions differently from perceptions of the national economy. One hypothesis is that the tone of the news may have a greater impact on how people feel about the macroeconomy and the direction of the economy, but a more limited influence on how Americans perceive their own finances. In fact, in the quarter in which nearly half of Americans reported to Morning Consult that the US was in recession, consumer spending increased 3.8% – hardly the response predicted by a population fearing an economic contraction. If true, this hypothesis suggests that news bias may be more relevant to political than economic considerations.
In conclusion, our analysis shows a recent and systemic negative news bias when reporting the state of the economy. What is less clear is why this negative bias has emerged and how it affects both consumer sentiment and consumer activity. Understanding these links has important implications for understanding future consumer behavior, political sentiment, and perceptions about social progress.