U.S.: Are We Talking Ourselves Into A Recession?

Can gloomy talk doom the expansion? In the past, economists dismissed the notion that psychology can dominate real economic forces. No matter how many downbeat headlines people read, the theory went, the outlook always comes down to basics such as jobs, incomes, and profits.

But in today's economy, the past may no longer be prologue. That's because psychology does indeed have a huge impact on the stock market, and never before has the market played such a big role in real economic activity. It was market psychology more than fundamentals that drove technology share prices up so rapidly in 1998 and 1999. The resulting surge in wealth was the jet fuel that powered the growth rate of consumer spending and the economy into the 5% to 6% range, causing the Federal Reserve to put on the brakes.