Persistent Uncertainty Is Likely to Hold Back Economic Recovery

In these respects, “there is no close historic parallel to the COVID-19 contraction,” the researchers write. They used five forward-looking measures of uncertainty for the US and the UK to examine uncertainty levels before and after the crisis hit.

Stock market volatility: The researchers used the one-month and 24-month Chicago Board Options Exchange’s CBOE Volatility Index, known as the VIX, which measures expected future volatility of the S&P 500 Index. The one-month VIX went from just 15 in January 2020 to a peak of 82.7 on March 16—higher than the 80.9 recorded in October 2008 at the peak of the 2008–09 financial crisis.

Newspaper-based economic policy uncertainty: An economic policy uncertainty index developed by three of the researchers—Northwestern’s Scott R. Baker, Stanford’s Nicholas Bloom, and Davis—tracks the frequency at which the terms related to economics, policy, and uncertainty appear in 2,000 US newspapers. The indicator soared from about 100—considered average—in January 2020 to a record of more than 500 in March and April.

Twitter-based economic uncertainty: The researchers collected tweets from around the world containing the words economic and uncertainty and their variants, from January 1, 2010, to June 1, 2020. They found large spikes in such tweets amid the pandemic, with a peak from April 22 to 28.

Subjective uncertainty about future business growth: The researchers analyzed findings from the monthly Survey of Business Uncertainty, a sounding of US business executives that assesses managers’ confidence in their own sales projections. For the UK, the researchers used a similar measure, the monthly Decision Maker Panel. Both metrics showed major jumps in uncertainty in March and April 2020 before easing slightly in May.

In the UK, the percentage of businesses reporting that COVID-19 was “their single largest source of uncertainty” soared from around 25 percent in early March to nearly 90 percent in early April. The pandemic quickly replaced Brexit as the top-of-mind concern.

Forecasters’ disagreements on GDP growth: The US Survey of Professional Forecasters and the UK Survey of External Forecasters measure experts’ disagreements on year-ahead GDP projections. Both showed a historically high level of forecaster disagreement. Among US forecasters, disagreement rose from a standard deviation of 0.32 percentage points in the first quarter of 2020 to 2.74 percentage points in the second quarter—an eightfold increase. Among UK forecasters, disagreement levels rose from 0.49 percentage points to 10.1 percentage points in the same period—a 20-fold gain.

While all indicators showed huge spikes in uncertainty, the researchers find significant differences in amplitude among them. For instance, the 20-fold spike in UK disagreement about GDP dwarfed the 100 percent rise in both UK business uncertainty and the two-year VIX.

Indicators also peaked at different times. For instance, the VIX soared in late February, peaked in mid-March, and then fell by late March as stock prices began to recover. Broader measures, such as business growth uncertainty and newspaper-based economic policy uncertainty, peaked later before plateauing, highlighting the contrast between uncertainty on Wall Street and on Main Street.

While rising equity prices in the midst of the pandemic might seem incongruous, they may in part reflect investor expectations of a rapid recovery, Davis says. But for recovery to occur, a surge in new economic activity is necessary, and that isn’t likely amid the record levels of uncertainty.