It’s intuitively obvious that “uncertainty” matters in economic decision-making. If the risks of making a choice–starting a company, making an investment, buying a house–look especially big in the present, then there is reason to postpone that decision. As a result, higher uncertainty can lead to a drop in economic activity. Thus, it’s a concern that, by some measures, economic uncertainty is on the rise.
For example, here’s the Economic Policy Uncertainty Index for the United States, as reported by the FRED website run by the St. Louis Fed. You can see the recent spike on the far right.
Or here’s the Global Economic Policy Uncertainty Index:
These graphs are surely a reason for concern. Whatever the merits of a “move fast and break things” approach in certain contexts, it obviously will increase uncertainty. But how does one measure uncertainty? What is being measured here?
The US uncertainty index is not official government data. It is based on a method developed by three economists, Scott R. Baker, Nick Bloom, and Steven J. Davis. I mentioned their approach here when it was first being developed back 2012. They combine three sources of data: “the frequency of newspaper articles that reference economic uncertainty and the role of policy; the number of federal tax code provisions that are set to expire in coming years; and the extent of disagreement among economic forecasters about future inflation and future government spending on goods and services.” The average value from 1985-2010 is arbitrarily set at 100. Thus, you can see spikes during the Great Recession, the pandemic, and now early in 2025.
For a discussion from Nicholas Bloom about this and other ways of measuring uncertainty, and how they relate to actual economic outcomes, a useful starting point is his article, “Fluctuations in Uncertainty,” in the Spring 2014 issue of the Journal of Economic Perspectives (where I work as Managing Editor).
An obvious concern about measures of uncertainty based (at least partly) on news reports is that there may be a divergence between how the media is covering the news of the day and what actual investors and business people are doing and saying. At least at the moment, there appears to such a divergence.
For example, a standard measure of uncertainty in financial markets is the CBOE Volatility Index from the Chicago Board Options Exchange, commonly called the VIX. The basic idea is to look at expectations of volatility of the stock market, by looking at the options that investors are buying on future values of the S&P stock market index. For example, if more investors are buying options to protect themselves against especially large falls in stock prices, then volatility would be up. But the VIX isn’t showing a rise in uncertainty just now.
Another way to measure uncertainty is ask businesses about their sales and employment forecasts 12 months in the future, and how much uncertainty they feel about those forecasts. The Federal Reserve Bank of Atlanta carries out a Survey of Business Uncertainty with this approach, and it does not show a prominent recent uptick in business uncertainty.
I don’t quite know what to make of these various meausures. The Baker-Bloom-Davis measure of uncertainty has been tested and used in research, and it cannot be casually dismissed. However, other meausures of uncertainty are not spiking int he same way. At the moment, it seems fair to say that there’s uncertainty about uncertainty, which isn’t the same thing as greater uncertainty, but perhaps headed in that direction.
