I think Arnold Kling is onto something here:

If everyone scans the headlines and sees "Great Depression," that could very well cause a drop in consumption. And if everyone scans the headlines and sees "recovery," they might spend more.

We could also observe herd behavior among producers. I have been talking a lot about Garett Jones' remark that today's work force produces organizational capital rather than widgets. It is time to elaborate on this notion.

After a long comparison of information-based businesses versus manufacturing, he concludes:

Thus, my experience fits very well with the notion that workers are needed in order to build organizational capital. In today's economy, the organizational capital often is embodied in a computer system of some kind. Those systems depreciate very rapidly, because of technological innovation and the evolution of business demands.

Other forms of organizational capital are embodied in human capital. For example, an airline needs to have an effective program for training its employees and for ensuring the quality of their work. If your flight attendants are surly, some of your customers will switch to a different airline next time.

The macroeconomic significance of all this is that the choice of when to invest in organizational capital is discretionary. If you read a bunch of headlines that say "economic downturn," you can cut back your labor force to just the number of people needed to keep today's business operating. If you read a bunch of headlines that say "recovery," you may become inclined to invest in projects that make your business more complex or more competitive.

The Quarterly Business Report we do at SCSU for central Minnesota includes a survey of local business leaders. We don't take a temperature of business confidence directly, but we can track their assessment of the national economy along with their own plans to expand payroll, wages to be paid and prices to be received, etc. I have long wanted to see if these data could be used somehow in a confidence index. There is some evidence that business confidence is a turning point indicator (McNabb and Taylor [2002], Holmes and Silverstone [2007] ). There's also at least anecdotal evidence that reporting on economic news influences that confidence. (This is why President Obama probably shouldn't say "double dip recession" in public.) Indeed, Google Trends still averages ten times more for recession than economic recovery.

Labels: economics, forecasting, St. Cloud