The Impact of Economic Uncertainty

On March 5, 2025, the Wall Street Journal told us, “Welcome to the Trump tariff thrill ride, where you never know what’s going to happen next.” We could say that this “Trump Tariff Roller Coaster” is a recipe for uncertainty.

Economic Policy Uncertainty (EPU)

We can be concerned about uncertainty because of its impact on economic growth..

The US Economic Policy Uncertainty Index (EPU) is based on words that relate to uncertainty and the economy in 10 prominent newspapers. Also, it quantifies temporary federal tax provisions that could change and checks for economic forecasting disagreement. With other countries, the number of newspapers and criteria differ somewhat but they are all similar.

Based on EPU criteria, global economic policy uncertainty has shot skyward beyond a Covid high:

Below you can compare the EPU Index for the UK, US, and India. (Please note that the y-axis for India is different from the other two.):

Next, for a markets perspective, uncertainty investigators use the VIX. As a projection of market volatility, the VIX conveys sentiment. about the next 30 days. Far from Covid highs in 2020, the VIX is on the upswing:

Our Bottom Line: Economic Growth

Economist Michael McMahon (University of Oxford) explains why uncertainty tugs GDP downward. He reminds us that business firms need to predict sales, consumers care about their future wellbeing, and students predict a higher wage will come from a college education. All base decisions on expected outcomes.

In a list for the Economics Observatory, McMahon starts with the business investment in buildings and research that fuels growth. He cites the firm hiring that shrinks when the future is unclear. Then, following the ripple, we see that market volativity, borrowing costs, and household saving (rather than spending) all rise.

The result is an inverse correlation between uncertainty and economic growth. Because GDP measures the value of goods and services production, dips in investment, hiring, and consumer spending shove growth downward.

Covid uncertainty accelerated dips in employment, investment, and sales:

Similarly now, WSJ suggests “the Trump roller coaster” will cause new declines.

My sources and more: For uncertainty, the Economic Uncertainty Index website is the most handy destination. Then, further checking took me to the Economics Observatory and our past econlife post. And finally, WSJ made the current connection.

Please note that several of today’s sentences were in a past econlife post.