The state of the economy is a key driver of consumer spending and perceptions about the overall direction of society. Yet a widening gap between economic fundamentals and news tone has emerged, with the former having a disproportionately negative impact on both household financial decisions and perceptions about the economy’s health. The reason for this disparity is not entirely clear, but it is possible that the growing negativity of economic news has been influenced by heightened political polarization and the increased consumption of ideologically biased cable news channels.
A Basic Model of the Effects of Economic News
In principle, any change in a key economic indicator should cause a shift in asset prices, with bond yields and exchange rates responding most strongly and stocks reacting less so. In reality, though, the magnitude and persistence of the response vary widely. This article explores some of the reasons why.
One major factor is that survey data may capture market expectations with errors, with leads ranging from a few days to a week or more. Another is that many indicators are released with a lag, and the markets’ anticipation of an announcement often erodes during this time. In addition, the aggregation of information in news releases may distort the underlying signal. The authors find that only a small number of announcements—the nonfarm payroll numbers, the GDP advance release, and a private sector manufacturing report—generate price responses that are economically significant and measurably persistent.
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