Posted by Milos Sugovic
Pointing fingers is a fun and popular game during an economic slowdown. The media has been screaming recession for months now, and they might get it.
The media influences expectations of economic agents, and expectations determine behavior, which paves the course of an economic downturn. With all the slump talk, it’s no surprise nine out of 10 respondents to the Reuters/University of Michigan survey on consumer sentiment say the economy is in a recession. Even less surprising is the stagnating consumer spending and negative growth in industrial production, a proxy variable for investment.
If consumers anticipate a recession, they expect wages to drop in the coming months and will reduce current spending. The drop in consumption means lower markup, lower industrial production, and lower wages. So not only does expecting an outcome create it, there’s negative-feedback and a multiplier effect.
The moral: Expectations determine current and future outcomes, so be careful when tinkering with them.
The independent National Bureau of Economic Research (NBER) is the official referee that identifies the beginning and end of a recession, and a decision could set the buzz and expectations on course. But that decision can take anywhere from six to 18 months and is desired sooner rather than later.
In the meantime, we’ll just have to rely on antsy media speculation.
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