Uncertainty about Uncertainty
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Bibliographic details
- Authors: HITES AHIR, NICHOLAS BLOOM, DAVIDE FURCERI
- Published: September 3, 2025
Overview
- Title: Uncertainty about Uncertainty
- Publication: F&D Magazine
- Authors: HITES AHIR, NICHOLAS BLOOM, DAVIDE FURCERI
- Date: September 2025
- Core takeaway: Text-based measures of uncertainty have surged in 2025, financial-market measures are elevated but not extreme, and survey-based measures show little recent increase. The authors conclude uncertainty has risen above long-term levels but is below the peaks of the global financial crisis and the pandemic; the 2025 surge is likely to slow growth through 2025 and 2026 but not induce a global recession.
How uncertainty is measured
- Three main measurement approaches:
- Textual analysis (newspapers, country reports)
- Economic Policy Uncertainty (EPU) Index: analyzes newspaper mentions of economics, policy, and uncertainty; in 2025 the EPU for the United States reached a record high.
- World Uncertainty Index (WUI): frequency of the term “uncertain” in Economist Intelligence Unit country reports (71 countries); shows a similar trajectory to the EPU.
- Concerns: evolution of language, potential bias in sources, and word counts as imperfect measures of intensity.
- Financial-market-based measures
- VIX (Chicago Board Options Exchange Volatility Index): one-month-ahead implied volatility of the S&P 500.
- In 2025 the VIX has been elevated—reaching 32 in April—but that was not a large spike compared with previous jumps.
- Other market-based measures (e.g., ICE BofA MOVE Index) show increased but not extreme uncertainty.
- Business surveys
- US Survey of Business Uncertainty (SBU): administered by the Atlanta Federal Reserve Bank; queries almost 1,000 US businesses each month about sales forecasts.
- SBU uncertainty roughly doubled between January and May 2020 during the pandemic; through June 2025 there was no uncertainty surge.
- SBU panel raised predictions for sales growth after the November 2024 election of Donald Trump; forecasts declined in spring 2025 after the beginning of tariff wars.
- UK Decision Maker Panel: polls about 2,500 businesses a month; UK sales uncertainty index mirrored the US pattern—surged during the pandemic but no recent increase.
Empirical comparisons and interpretation
- Observed divergence in 2025:
- Text-based indicators: exceptionally high, record-level discussion of uncertainty.
- Financial-market indicators: elevated but not extreme (VIX reached 32 in April 2025).
- Survey-based indicators: largely flat through June 2025 (no broad surge).
- Possible explanations for divergence:
- Text measures may be excessively high due to intense media focus on US political turmoil (e.g., Trump administration).
- Financial and business measures are shorter-term and US-focused and may miss longer-term global uncertainty.
- Authors’ inference: global uncertainty has risen, but not as much as text-based measures suggest; truth is intermediate between measures.
Mechanisms: how uncertainty affects the economy
- Real-options channel
- High uncertainty increases the option value of delay for irreversible investment decisions, causing firms to postpone investment and hiring.
- When decisions are reversible, firms may shift toward part-time labor or renting rather than permanent hires or purchases.
- Consumption channel
- Individuals postpone purchases of durables (housing, cars, furniture) when income or economic uncertainty rises.
- Financial channel
- Uncertainty raises risk premiums, increasing the cost of borrowing and the probability of default.
- Interaction with financial conditions
- Uncertainty effects are magnified when financial conditions are tight; uncertainty and financial frictions can have a multiplicative impact.
Findings on macroeconomic impact
- Empirical literature summarized:
- Greater uncertainty strongly reduces investment.
- Uncertainty has a weaker effect on employment and consumption relative to investment.
- Uncertainty contributes to business cycle dynamics.
- Scenario implications for 2025 surge:
- If uncertainty rose as much as text-based measures indicate: potential for extremely damaging effects, possibly leading to a global recession.
- If uncertainty rose as signaled by financial markets: might slow growth without generating a recession.
- If business surveys are correct: little change in uncertainty over the past year.
- Authors’ best judgment:
- Uncertainty has risen above long-term levels but has not reached the peaks of the global financial crisis or the pandemic.
- The 2025 surge in uncertainty will likely slow growth by reducing investment, hiring, and consumer spending on durable goods.
- Timing: these effects typically take 6 to 18 months to slow growth (Caldara and Iacoviello 2022).
- Outlook: slowdown likely through 2025 and 2026, but the rise in uncertainty is not large enough to induce a global recession.
Key statistics and exact figures (as reported)
- VIX: reached 32 in April 2025.
- US Survey of Business Uncertainty (SBU): queries almost 1,000 US businesses each month.
- UK Decision Maker Panel: polls about 2,500 businesses a month.
- SBU uncertainty: roughly doubled between January and May 2020.
- Typical lag for uncertainty to slow growth: 6 to 18 months.
Uncertainty about Uncertainty, F&D Magazine, September 2025; authors HITES AHIR, NICHOLAS BLOOM, DAVIDE FURCERI.
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