The Housing Chronicles Blog: How the media's focus on bad news can lead to recession

Thursday, March 6, 2008

How the media's focus on bad news can lead to recession

One of my biggest beefs with the blogosphere is the lack of balance among many blogs, which pick an agenda and stick to it and deliberately ignore news items which contradict their missions; whereas big newspapers have multiple layers of fact-checkers and editors, blogs are the unedited musings of individuals. While this is certainly the strength of blogs -- which can quickly break important stories often much faster than newspapers -- it's also the concept's weakness, as objectivity can be clouded by specific agendas (i.e., even The Drudge Report tends to lean to the right rather than the center). To be sure, mainstream media also has their agendas, such as the New York Times' Left-of-center reputation or Fox News' rather obvious embrace of the Right, but when covering issues such as economics or the housing market, balanced blogs may one of the only remaining hopes left for readers in search of simple, agenda-free information.

That's why the question posed by Chris Farrell in Business Week is both important and timely: "Are we talking ourselves into a recession?"

You can't escape the R-word these days. The question of whether the U.S. is in a recession—or in the process of sliding into one—dominates economic analysis and financial reporting, as well as conversations at work and around the kitchen table...

The old saw says a recession is only clearly visible in the rearview mirror, and yet it seems Wall Street pros and the financial media are echoing the eternal forward-looking query of impatient children on the long drive to Grandma's house: Are we there yet?

That prompts another question: Are we talking ourselves into recession? I'm not suggesting the media caused the economy to stumble. I'm usually skeptical of charges that the press wields enormous influence over economic activity. Most business journalists have heard a real-estate broker complain that the media were pushing down home prices, or a Wall Street money manager rant about downbeat stories driving stock prices lower. Yeah, right.

Yet there's no doubt the discussion about the economy has taken a dark turn lately. And narratives, stories, and metaphors do matter. After all, in a global economy there is so much information (data, rumor, judgment, talk, theories, algorithms, speculations, price movements, and news) that we tend to come up with narratives to make sense of what is going on. "Economists are usually very careful to avoid entering such evidence," writes Robert Shiller, economist at Yale University in his recent paper, Historic Turning Points in Real Estate. "And yet, research by psychologists has found that narrative-based thinking is extremely important in human decision-making."

Of course, there are good reasons for economic pessimism today. Prices in the residential housing market are down sharply and foreclosures are skyrocketing. The job market is deteriorating, and the stock market is downbeat. Oil is trading at record prices (even after adjusting for inflation). Financial institutions have written off billions and billions in loans, with more write-offs coming. Each of these trends affects real people: The homeowner that signed a toxic mortgage now watching the bank foreclose on the house, a worker getting laid off because of Chinese competition, a family forced into austerity to pay the spiraling gasoline, heating oil, and food bill.

Nevertheless, a good number of economists still believe the glass remains half full. The federal government's fiscal stimulus is coming. The Federal Reserve Board is aggressively easing interest rates. Exports are flourishing. The agricultural sector is booming. Inventories are well-contained. While the 7% of inflation-adjusted gross domestic product made up by housing and autos declined by nearly 12% over the past year, the segments of the economy that make up the remaining 93% of real gross domestic product rose at a healthy 3.8%, calculates James W. Paulson, chief investment officer at Wells Capital Management. "Sensitivity to signs of economic weakness have been magnified while evidence to the contrary is often ignored," he says.

Think about it. How many dinner table and workplace discussions have you had about the weakening economy, the foreclosed home, the credit-card induced bankruptcy, the corporate downsizing? During those conversations, how many upbeat tales have you offered up?

Any of you other real estate bloggers listening here?

Yes, the news is generally bad, but are some good stories too -- like how using reverse mortgages, auctions, house swaps and lease options can provide alternatives to a frozen mortgage market. When I offered up such a post to the Carnival of Real Estate 10 days ago, it was named "Post of the Week" simply because it was offering solutions instead of repeating the same dire predictions.

Shouldn't a popular and responsible blog also strive to point out solutions -- or am I just being unrealistic here? isn't hard to imagine that negative economic news can eventually turn into something of a vicious cycle. That seems to be an implication of Consumer Sentiment, the Economy, and the News Media, by Mark Doms of the Federal Reserve Bank of San Francisco and Norman Morin of the Board of Governors of the Federal Reserve System. The scholars delved into how 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.

For instance, note the authors, the headline "Recession Possible" has a bigger impact than an article entitled "Economic Conference Presents Diverse Views." And for better or worse, we're getting a lot of headlines with the R-word featured prominently—such as this one.

Americans can't talk a strong economy into a weak one. Neither can the press. Only the Federal Reserve can do that. The underlying economic activity is ultimately what determines whether the economy moves into expansion or contraction. Yet at major economic turning points, the tone of the conversation can push the economy further in one direction or another. This time around, it looks like that direction is down.

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