Is the Media Stifling the U.S. Recovery?

Americans are becoming more pessimistic about the future, despite not seeing their own economic situations worsen

One practical economic problem is that perception can sometimes dictate reality. Even if the economy is moving along well, if consumers get spooked -- whether for a legitimate reason or not -- it can take a step back. Of course, the reverse is also true: that's what causes bubbles. Irrational optimism about some asset, like houses, causes too much economic activity, which leads to a painful correction. Because perception matters, the media plays an important role. If it pushes the public in the wrong direction, then their sentiment about the economy could be skewed with a counterproductive result.

A new survey from the Pew Research Center for the People & the Press suggests that Americans are becoming more pessimistic about the future -- even though the present situation hasn't worsened. The results can be seen to the right.

Let's ignore the middle column and just focus on October 2010 and June 2011. Over this period, the U.S. economy appears to have slowed due in large part to consumers pulling back. So sentiment really matters here.

For starters, most people's view of the current economy remained the same (first question). Their financial situation (third question) also barley changed over these eight months. So people don't actually see the economy having worsened and aren't personally doing much better or worse than they were in October.

Yet the second and fourth questions are telling. Americans are much more pessimistic about what the future holds a year from now. Now, net 6% of respondents see the economy being worse a year from now. About the same margin see their finances getting worse in a year as well.

This is a little bit perplexing. Even though their present hasn't changed -- according to their own responses -- Americans now expect things to look worse a year from now. If they have no experience to suggest that the economy will worsen, then what are their expectations based on? One potential explanation is the increasingly negative media reports.

There are other possibilities as well, however. Perhaps people expected the economy to improve more than it has. That could shift their view of the future, if they no longer believe the recovery will endure. But again, since these people haven't seen their present situation worsen, an external factor may be affecting their expectations.

If the media has caused consumer perception of the economy to darken, then that's a problem. At this time, all of the obstacles that have slowed the economy appear to be transitory. Commodity prices haven't risen in recent weeks like they had in the spring. Japan is beginning to recover from its terrible earthquake. Even Greece appears to have found a temporary band-aid that should stop its bleeding for a few years as the global economy gets back on its feet. While the economic reports haven't been particularly encouraging since April, they need to be understood within the broader economic picture.

It may already be too late for sentiment to reverse course, however. Even if Japan bounces back, Europe stabilizes, and commodity prices recede, it might not matter. If the American consumer has become pessimistic and pulls back spending this summer as a result, then economic growth will be anemic. And of course, if spending and hiring slow, then this will serve to validate what those consumers had come to believe. But in that case, they didn't accurately assess the economic situation; they just gave into a self-fulfilling prophecy.

Image Credit: REUTERS/Brendan McDermid