As financial markets careened in late 2018, commentators chalked it up mostly to investors' uncertainty. At the same time, business contacts were telling Atlanta Fed president Raphael Bostic and other Fed officials they were increasingly uncertain about the economy amid trade tensions, slowing global economic growth, and a changing interest-rate environment.
The real impact of uncertainty on economic activity has historically been amorphous: important, yet difficult to quantify and understand.
That could be changing. A growing body of research is building a more empirical case that uncertainty on the part of policymakers, businesspeople, and consumers can significantly affect important economic activities such as purchasing, investing, and hiring.
A new contribution to this research debuted recently. Along with other leading researchers of economic uncertainty, the Atlanta Fed has refined a first-of-its-kind national survey to directly gauge uncertainty among business decision-makers across a range of industries. In December, the Atlanta Fed/Chicago Booth/Stanford Survey of Business Uncertainty (SBU) began publicly releasing data on executives' 12-month-ahead expectations for their firms' capital spending (for big-ticket items like buildings and equipment), employment growth, sales revenue growth, and cost change.
"Business investment in capital is one of the things we know to be critical in determining a country's productivity and economic growth," said Atlanta Fed research director Dave Altig. "And one of the driving factors of business investment seems to be uncertainty. The structure of the SBU allows us track how uncertainty affects investment expenditure plans, and the relationship of these decisions to sales growth, costs, and employment."
The survey calculates the degree of uncertainty surrounding each responding firm's outlook and combines that finding into an overall reading. Policymakers and researchers can use SBU data to better understand how business expectations and uncertainty affect actions that shape the nation's economy.
This sort of anticipatory information is vital to monetary policymakers. That's because most hard data on the economy—such as employment and gross domestic product (GDP) growth—describe what's already happened, noted Nick Parker, the Atlanta Fed's survey director. But predictive information is critical as, by its very nature, monetary policy must be forward looking. Today's policy actions likely won't influence real-world conditions for many months, so it is important to make the best possible forecast of future circumstances.
SBU the first to directly gauge uncertainty among businesses
The Atlanta Fed's Nick Parker.
Photo by Kendrick Disch
"Before the SBU, only proxy measures of business uncertainty, like the VIX (financial market volatility index) and Economic Policy Uncertainty Index, were available. There wasn't anything that really dealt directly with firms," Parker explained. "But now we have a measure derived from the expectations of actual firm decision-makers."
It appears to be working. As Fed policymakers grapple with mixed economic signals—generally solid data alongside various concerns—the SBU has produced "great insights," Bostic said in a December speech.
For example, in a special question in late 2017, the SBU asked firms how federal tax reform would affect 2018 capital expenditure plans. The survey's findings proved accurate, as about two-thirds of firms said their capital spending plans would not change, and indeed capital expenditures have remained sluggish, Bostic said. The SBU often includes a special question on a topical issue along with its usual queries.
Refined and ready for public consumption
The survey originated in 2014 as a tool for Fed officials. Late last year, Parker and SBU collaborators—including Nicholas Bloom at Stanford University and Steven Davis at the University of Chicago, who created a widely cited index of economic policy uncertainty—determined the tool had been sufficiently refined to publicly release the data.
The Atlanta Fed plans to start releasing SBU results in February, by topic: employment growth, capital expenditure growth, cost change, and sales revenue growth. Further ahead, the surveyors are eager to see what their tool reveals if the economy turns or if there's an unexpected economic shock, Parker said.
Davis and Bloom are noted experts on economic uncertainty. Their interest in the subject meshed with the Atlanta Fed's expertise in surveys, and particularly with the Bank's earlier measures of uncertainty surrounding inflation expectations, Parker explained.
Uncertainty has attracted increased attention from economists in recent years as a factor that could affect the economy's direction. A 2018 paper by Bloom and four coauthors, for instance, finds that uncertainty shocks typically lead to a "sharp drop [in GDP growth], quick recovery, and then continued sluggishness in output. This suggests that uncertainty could play an important role in driving business cycles."
It follows, then, that clearer understanding of when uncertainty is spreading and how it plays out can better inform policy and business decision-making. The folks behind the SBU intend to help.
Charles Davidson
Staff writer for Economy Matters