Opinion: Has the media talked us into recession?

By Infometrics economist Gareth Kiernan I've been asked a number of times recently to what extent the media is "responsible" for the recession currently gripping the New Zealand economy and the rest of the globe. Since the start of 2008, we have been regaled with a progression of economic disaster stories, with themes ranging from drought to widespread job losses, from housing market collapse to soaring fuel and food prices, from sub-prime meltdown to General Motors bankruptcy. Bad news sells best, but have households been unduly browbeaten by the endless column-inches of pessimism? Household spending contracted 0.7% over the 2008 calendar year, despite continued growth in aggregate incomes. In other words, household savings rates were improving. In part, that lift in savings represents a structural shift in behaviour that had to occur following the debt-fuelled spending over much of this decade "“ consumer spending grew at an unsustainable 4.6%pa between 2002 and 2007. But some of the improvement is precautionary behaviour as people prepare for the worst. Quantifying the media's impact on confidence and spending decisions is not a simple task. Taking a hermit who never reads the paper or watches the news would not be a suitable control, because they would arguably be under-informed and their decision-making would be worse because of it. Such a person would be oblivious to any risk of losing their job, and would only modify their spending behaviour once they had become unemployed. This response is clearly less satisfactory than undertaking some precautionary savings before being made redundant so that you have some money to help tide you over while you look for a new job. In other words, it is rational for people to change their spending behaviour in response to changes both in their actual financial situation and the perceived risks to their finances. Wanting to be prepared for the worst (or being risk averse) may mean that, on average, people make too much allowance for negative outcomes such as redundancy. But accurately assessing those risks is where the difficulty lies. The culpability of the media (if that is the right word) should be limited to instances of misrepresenting the facts, scaremongering, or, most likely, endless repetition of the same story wearing down people's optimistic resistance. When you've read dozens of articles about significant layoffs you naturally start to feel less secure in your job, and when you hear forecasters talking about the unemployment rate potentially reaching double digits, worries about how you'll personally be affected can escalate. The latter point is where economists and other analysts come in. Reporting what has happened is one thing; speculating on how bad things might get is another kettle of fish. My day job is to provide businesses with information that is useful in making their strategic decisions, and to be as accurate as possible in those predictions. Highlighting risks (both upside and downside) is an important component of forecasting, but is secondary to the core forecast of how economic events are most likely to unfold. But when grabbing the attention of the media or making sound-bite appearances on the TV news, the more sensational, the better. Even when a reporter is presented with a broad economic forecast, it will be the most extreme and alarming parts of the outlook that will hit the headlines. And then there are some commentators that specialise in highlighting outrageous scenarios, on the basis that you'll probably forget their prognostications if they don't happen "“ but you'll sure remember if they come true! In an age of mass media, many people approach news reports with a decent dose of scepticism. And personal experience has shown me that often economists are viewed even less charitably "“ some people put the respectability of economic forecasting somewhere between reading tea leaves and weather forecasting. But remember that letting your own prejudices get in the way can be just as unhealthy as blindly believing any news you read or hear. Sticking your head in the sand is as detrimental as being blown about by the latest shift in opinions. In making decisions and planning for the future we should ensure that we're making the best use of the information that's available today. In assessing the media's role in the downturn, it's worth remembering that there are very real factors that have led to the recession. Perhaps no more than half a percentage point of the contraction in GDP that has occurred so far can be put down to overly cautious behaviour by households. Some of that caution can be tied back to talk of 30% falls in house prices or unemployment hitting 11% (both of which seem unlikely to occur). As uncertainty and fear start to dissipate, the stage will be set for a rebound in economic activity as for most people, the worst has been avoided. We may not be at that point quite yet, but the tea leaves have steadily looked more positive over the last three months. ________________ * Infometrics is an economic information and forecasting company based in Wellington. To find out more, see its website here. This piece first appeared in the Dominion Post on June 6, 2009.