Abstract: The news media affects consumers' perceptions of the economy through three channels. First, the
news media conveys the latest economic data and the opinions of professionals to consumers.
Second, consumers receive a signal about the economy through the tone and volume of economic
reporting. Last, the greater the volume of news about the economy, the greater the likelihood that
consumers will update their expectations about the economy. We find evidence that all three of these
channels affect consumer sentiment. We derive measures of the tone and volume of economic
reporting, building upon the R-word index of The Economist. We find that there are periods when
reporting on the economy has not been consistent with actual economic events, especially during the
early 1990s. As a consequence, there are times during which consumer sentiment is driven away
from what economic fundamentals would suggest. We also find evidence supporting that consumers
update their expectations about the economy much more frequently during periods of high news
coverage than in periods of low news coverage; high news coverage of the economy is concentrated
during recessions and immediately after recessions, implying that "stickiness" in expectations is
countercyclical. Finally, because the model of consumer sentiment is highly nonlinear, month-to-month
changes in sentiment are difficult to interpret. For instance, although an increase in the
number of articles that mention "recession" typically is associated with a decline in sentiment, under
certain conditions it can actually result in an increase in various sentiment indexes.