Recent reports from various communities and industries indicate that increased uncertainty is affecting decision-making processes. This uncertainty comes from several sources, including trade policy, monetary policy, fiscal changes, and possible shifts in economic fundamentals. These factors have contributed to recent changes in consumer sentiment, business expectations, and volatility in asset markets. Economic data are starting to show how households and businesses are adjusting their behavior in response to these conditions, but a complete understanding will take more time.
A new edition of the Rocky Mountain Economist summarizes research by Kansas City Fed economists on how uncertainty can impact the economic outlook. The publication also highlights recent actions taken by regional businesses during this period of heightened uncertainty. Previous studies have found that rising economic uncertainty and financial volatility can slow household consumption and business investment. Trade barriers and related uncertainties may also increase production costs along supply chains. Current information from regional businesses suggests that economic activity is adjusting as seen in previous periods of high uncertainty.
“Heightened uncertainty resulting from various drivers can be difficult to track and understanding its implications for the economic outlook can be even more of a challenge,” according to the report.
Research by Basu and Bundick (2016) shows that an increase in uncertainty can lead to macroeconomic fluctuations by reducing overall demand. Their work finds that such shocks cause significant declines in output, consumption, investment, and hours worked—effects that tend to persist for up to three years. Additional research indicates output contracts after periods of elevated financial market volatility.
Chart data cited from multiple Federal Reserve surveys point toward moderation in planned capital expenditures among businesses recently. Business expectations about future conditions have softened as concerns about customer demand rise. While both capital plans and sentiment have declined from previously high levels, overall expectations remain slightly positive at this stage.
The effects of global uncertainty are not limited within U.S. borders; they also influence export demand. Nicholas Sly’s 2016 study showed that greater global financial market volatility or doubts about foreign growth often result in lower demand for U.S exports. During periods when international confidence improved—such as between 2011 and 2015—U.S export growth increased alongside declining global uncertainty.
Trade policy has emerged as another significant source of current uncertainty. At the Kansas City Fed’s 2017 Economic Symposium in Jackson Hole, panelists discussed how trade policy unpredictability affects employment and investment beyond just direct trade costs. Uncertainty over trade rules influences supply chain decisions, inventory management, and hiring practices among firms.
Recent survey results reveal that most regional firms expect upcoming trade policy adjustments will raise their operating costs over the next year; many anticipate higher prices as a result. However, opinions differ regarding future demand: some expect it to rise due to domestic protections while others foresee lower demand because higher costs could hurt competitiveness.
“Peering through the fog of uncertainty can be difficult for businesses, policymakers and households,” states the report.
Past experiences suggest historical episodes may help guide current responses as similar patterns emerge today. The ongoing challenge remains monitoring how different sources of risk combine to shape future outcomes—for example, whether slowing demand might ease price pressures or if cost increases driven by trade policies will push them higher instead.
