Where We Are Sure of Economic Uncertainty

Economic uncertainty is unusually elevated.

When economists refer to uncertainty, they mean just what we would expect. They are thinking of an inability to forecast the likelihood of an event. Uncertainty matters because it can influence consumer spending, business investment, and economic growth.

So let’s take a look.

Economic Policy Uncertainty (EPU)

The pandemic created a slew of uncertainties. They include its duration, lethality, and infection rates. We also are not sure about vaccine boosters, when masks are a must, and social distancing. On the economic side, our questions relate to the speed of an economic recovery, the ups and downs of consumer spending, the return of business travel, and how much we will be working from home.

From here, starting at the top, we can focus on global economic policy uncertainty. Then, moving downward to specific countries, we can see where uncertainty is highest. And finally, the reaction of stock markets, businesses, and households will give us some clues about uncertainty. As for the metrics, economists have created uncertainty indexes that are based on words that relate to uncertainty and the economy in 10 prominent newspapers. They also quantify temporary federal tax provisions that could change. And lastly, they check for economic forecasting disagreement.

Based on their criteria, they see an upswing in global economic uncertainty that by February had flipped downward:

https://www.policyuncertainty.com/index.html

Below you can compare the EPU in Japan, China, the U.S. and the U.K. Please note that the y-axes differ:

Next, becoming more precise, uncertainty investigators use the VIX. As a projection of stock market volatility, it conveys market sentiment about the next 30 days, The VIX hit a mid-pandemic high during March 2020:

https://fred.stlouisfed.org/series/VIXCLS#0

In addition, we can size up business uncertainty through an Atlanta Fed index that shows firm expectations and uncertainties about sales and employment for the next year:

https://www.atlantafed.org/research/surveys/business-uncertainty

We can even use the words used in tweets for clues about household economic uncertainty:

https://voxeu.org/article/economic-uncertainty-wake-covid-19-pandemic

Our Bottom Line: Economic Growth

It is likely that we’ve wound up with an inverse correlation between uncertainty and economic growth. Because GDP measures the value of goods and services production, decreased growth might reflect dips in investment, hiring, and consumption that were caused by heightened economic uncertainty:

Of course, the unique character of the Covid pandemic makes it highly uncertain that the past can predict the future.

My sources and more: For uncertainty, the Economic Uncertainty Index website is the most handy destination. Then, further checking took me to Voxeu and this paper. And finally, for the policy perspective, this brief paper is ideal. (Some sentences from today were in a 2018 post on uncertainty.)