Mark Doms (from the San Francisco Fed) and Normin Morin (from the Board of Governors) have an interesting study of the effect of news reporting on consumer sentiment about the economy. Their first step was to construct measures of what's in the news.
We created an R-word index like The Economist’s with some modifications. First, we require the word “recession” or “economic slowdown” to appear in the headline or first paragraph of the article because we found that these articles tended to portray some negative aspect of the economy, such as high unemployment, budget difficulties, low profits, and how people cope when the economy sours... We also, extended our index to include 28 papers in addition to the Washington Post and The New York Times. Also, we were able to compute a similar index from the nightly news broadcasts for ABC, NBC, and CBS...
We also created a “layoff” index in a similar manner to the R-word index. Like the recession
index, articles that mentioned “layoff” or similar phrases such as “job cuts” and “firings” in the title
or first paragraph tended to focus on some negative aspect of the job market.
The authors also constructed a similar index for positive news. The next step (or one of the next steps) is to examine whether the news indexes helps to explain changes in consumer sentiment (obtained from the University of Michigan's Survey of Consumers) , over and above objective information about economic activity and surveys of professional forecasters. They find
...layoff and recession indexes enter significantly into models for many measures of sentiment. Specifically, the various sentiment measures are negatively related to the recession and layoff indexes and positively related to the economic recovery index. In fact, sentiment models that contain the newspaper information do a noticeably better job of explaining several periods when sentiment dropped suddenly, such as in 1990 and again in early 2001.
Furthermore:
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.
So can media bias harm the economy? Granting the authors' finding, the answer still depends on whether consumer sentiment actually drives behavior. As discussed in this earlier post, that is a complicated, and still controversial, issue.