Self-fulfilling recession

Never in my memory has the question of whether we're entering a recession gotten so much attention, both in the press and on Wall Street. At this point the conventional wisdom is that a recession has either arrived or is about to. Certainly, there's plenty of evidence pointing in that direction - tomorrow's employment report is expected to be dismal - and yet Business Week's Chris Farrell suggests that the half-filled glass crowd is getting shunted aside.

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.

[CUT]

It 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.

As Farrell points out, you can’t talk a strong economy into a weak one. But when you’re on the bubble, as is probably the case right now, it won’t take many scary and exaggerated headlines to push things over the edge.


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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
 
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
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