Is economic uncertainty a feeling … or a fact?
If we tallied up the most common words we’ve used on this show over the last handful of years, “uncertainty” would rank high on the list. We’ve used it to describe what’s happening in the housing market, the labor market, the stock market or really any corner of the economy.
But how uncertain is the economy, really? Uncertainty is a tricky thing to measure. Is it a feeling, or is it a fact? Turns out, it’s a bit of both.
“You really want to measure uncertainty because you want to know what’s in peoples’ heads,” said Nick Bloom, an economist at Stanford University.
He said, yes, you can survey peoples’ sentiment. Economists do this to, say, predict consumer spending. But to measure uncertainty about everything is a big, expensive task.
“So we have to get something as kind of a proxy for this,” he said.
Bloom has actually developed a method of measurement for this problem called the Economic Policy Uncertainty Index. It gets its data from the news.
“It actually counts the number of articles that talk about the economy, talk about policy and mention the word ‘uncertainty,'” he said.
Yep, I’m an uncertainty influencer. Which kind of makes sense if you think about who we interview on “Marketplace”: Policymakers, business owners and consumers.
Laura Jackson Young, an economist at Bentley University said there are some other ways to measure uncertainty.
“Volatility in financial markets, professional forecasters, looking at variation in their forecast errors, or we can really just think about how it’s affecting firms and household decision making,” she said.
Measuring uncertainty is similar to measuring the economy. But economists separate the two because of uncertainty’s effect. For example, a high level of uncertainty might mean companies hire less and consumers spend less.
“And it’s kind of like that can lead to this snowball situation where it even further exacerbates uncertainty,” she said.
Uncertainty breeds uncertainty. Which is maybe why lately it kind of feels like everything has been uncertain, all the time, forever. When’s the last time you didn’t feel uncertain about the economy? Jackson Young isn’t quite sure.
Right now, according to the Economic Policy Uncertainty Index, uncertainty is down from its all time high in May of 2020 but still twice the historical average.
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