NEW YORK — Economic uncertainty — defined as a lack of knowledge or disagreement over facts — makes predicting variables like GDP and inflation difficult. For fixed-income markets, where clear forward guidance on growth and price stability is essential for valuing assets and managing duration risk, that fog carries direct costs.
The result is a wait-and-see posture among consumers and businesses. Consumption, investment and hiring decisions get deferred, corporate earnings projections weaken and credit spreads widen.
For decades, the standard method for measuring uncertainty involved quantifying the dispersion of economic forecasts across analysts. Greater divergence in those forecasts signaled higher uncertainty.
More recently, researchers developed indices built on text analysis. The Economic Policy Uncertainty Index, created by Nick Bloom and co-authors, tracks how often the word "uncertainty" appears alongside economic and political terms in news articles.
The index shows sharp spikes during specific episodes — including Spain's sovereign debt crisis around 2012, the COVID-19 pandemic and U.S.-European Union trade tensions — reflecting how geopolitical stress feeds through to economic expectations.
The index has also trended upward since the late 1990s. Whether that reflects a structural rise in global economic uncertainty or simply more frequent use of the term in reporting remains an open question.
The Political Risk Index, created by Tarek Hassan and co-authors, applies a similar text methodology to earnings call transcripts from large companies. Because corporate executives and journalists draw on different sources of uncertainty, the two indices often diverge in instructive ways.
Tariff escalations by the Trump administration have been a recent driver of elevated readings. Frequent changes in tariff policy make it harder for businesses to plan, invest and hire, and push consumer prices higher.
Uncertainty also reshapes household spending. Under uncertain conditions, consumers concentrate spending on essentials — food, utilities and health care — and sharply cut discretionary outlays on hospitality, recreation and cultural services.
Not all uncertainty is negative. The discovery of a large natural resource deposit or the rise of a technology like artificial intelligence can generate uncertainty that points toward greater growth, even when the precise magnitude is unknown.
