Uncertainty plays a critical role in shaping the behavior of economic agents—households, businesses, and policymakers—in the U.S. economy. Its importance lies in how it affects decision-making, investment, hiring, consumption, and monetary policy responses
Businesses delay investment and hiring during periods of uncertainty because the future returns become harder to predict.
Households pull back on spending, especially on big-ticket items (cars, homes, vacations) when they feel uncertain about their job security, future income, or inflation.
High uncertainty complicates the Federal Reserve’s job, as it becomes harder to read the data and anticipate the effects of rate changes.
Uncertainty increases volatility in asset prices as investors reprice risk and adjust portfolios.
A large, temporary uncertainty shock causes Output to fall ~3.5% below trend at its trough, with recovery to baseline in ~1 year (Echoes the pattern: sharp contraction followed by rebound once uncertainty dissipates.)
Elevated uncertainty (post-2008 recession) ⇒ Unemployment rate about 1% point higher than it would be otherwise (Uncertainty slowed job recovery, keeping unemployment elevated.)
1929 stock crash ⇒ ↑ uncertainty about incomes ⇒ consumers forego durable purchases, exacerbating the GDP collapsestatic1.squarespace.com (Qualitative impact: uncertainty accelerated the demand drop in the Great Depression.)
Bank of America Comments on Current Uncertainty March 2025
Q1 GDP at around 1.5% GDP
Uncertainty is worse than bad news. Affect irreversible investment decisions by companies
If uncertainty remains for another 3 months it will have a permanent effect on investment spending and on consumption, hence communication from the governments is going to be key
Length of uncertainty is key, 3 weeks for now is only enough to affect soft data, but needs to be sustained to affect hard data.
They still see credit card spending being resilient, and private balance sheets are healthier. However, public balance sheet not.
A 1% in the effective tariff rate increases PCE by ~0.2%
According to a Goldman Sachs Study, a 10-point increase in the Economic Policy Uncertainty indices had tended to lower GDP growth by 10 to 15 basis points in the quarter when the increase happens and the quarter that follows.
Currently Uncertainty Index is up by more than 200 points, but need to remain sustained for real damage.
What’s your executive briefing and tldr assessment of the impact in quantitative terms?
What is the range of it? Which key insights/events/data releases are we going to focus on to have a good grip on the situation?
If this level of uncertainty only lasts a few weeks, probably the economic effects are very mild, and we will have a slower but still positive growth rate in the economy of ~1-2% (This is what is currently expected from most economist). Companies will most likely only pause investment and hiring temporarily while waiting for a bit more clarity
If however, the uncertainty remains for months without end, especially if negative news continues to mount from the gov and data, I could very well see this becoming a recession (-1% - 0% real GDP). In this case, companies could most likely stop permanently some investment for 2025 because they cant forecast clear growth, and consumers will become more defensive
Right now I am mostly focused on this kind of data:
Businesses sentiment and guidance (earnings calls, business sentiment surveys) is probably much more important than consumer sentiment at this point. Companies are the ones that will dictate first where investment and labor market go
Signs in hard data that the economy is slowing more than expected, and aligning with the very negative soft data, because for now while GDP for Q1 is expected to be very low, the economy is still growing a bit → earnings, spending, labor market, Inflation, credit spreads
The uncertainty index to realize how sustained it is becoming
The current expectations I have been reading is that after April 2 2025, uncertainty will start to come down because Trump’s plans will be clearer, and companies can start to plan around that again, but I am not really that sure about that, because negotiations (retaliations) will still most likely come, that could still change the picture as we move forward, and we could also start to see first economic effects of policies until now (eg. on CPI)
I think this quarter’s earnings will be especially important, especially related to companies guidance.
