Using data from US public firms’ regulatory filings and financial statements, we document that firms’ attention to macroeconomic conditions is counter-cyclical and their propensity to make production mistakes is pro-cyclical. Attentive firms make smaller mistakes, and mistakes of the same size are punished more by financial markets during downturns. We explain these phenomena with a business cycle model in which firms, owned by risk-averse investors, rationally allocate costly attention across states. When aggregate productivity is low, there are higher rewards for delivering profits, and firms optimally pay more attention and make smaller mistakes. Endogenously counter-cyclical attention generates quantitatively significant asymmetric, state-dependent shock propagation and stochastic volatility of output growth.