Recent reports from several industries and communities show that increased uncertainty is affecting decision-making across the region. Factors contributing to this uncertainty include unclear trade policies, monetary policy changes, fiscal adjustments, and concerns about shifts in economic fundamentals. The effects of these uncertainties are visible in changing consumer sentiment, shifting business expectations, and more volatile asset markets. While early economic data indicate households and businesses may be adjusting their behavior due to greater uncertainty, it will take time before the full impact is understood.
Research by Kansas City Fed economists suggests that rising economic uncertainty and financial volatility often lead to lower household consumption and reduced business investment. According to Basu and Bundick (2016), “heightened uncertainty is often large enough in its implications to lead to macroeconomic fluctuations by reducing aggregate demand.” They found that an uncertainty shock can cause significant declines in output, consumption, investment, and hours worked. The drop in output after such shocks tends to peak after a year and last for about three years. Further work by Bundick (2019) indicates that output usually contracts following periods of increased financial market volatility.
Data on stock market expectations also point to higher recent volatility as measured by the VIX index, consistent with an environment of heightened uncertainty. Consumption typically falls after a sudden rise in uncertainty and remains subdued for several quarters.
Recent surveys from various Federal Reserve Banks show a moderation in planned capital expenditures among businesses. Business expectations about future conditions have softened as concerns over customer demand grow. Although these declines follow previously high levels of optimism, overall expectations remain slightly positive. It remains uncertain whether current business activity represents a temporary moderation or signals a downward trend.
Uncertainty does not only affect domestic demand but also impacts U.S. exports abroad. Research by Nicholas Sly (2016) highlights how global growth concerns and foreign financial market volatility reduce demand for U.S. exports: “As uncertainty waned in many countries… U.S. exports to those markets rose.” Historical data confirm that periods of declining global uncertainty have supported export growth.
Trade policy is another major source of present-day uncertainty. At the 2017 Jackson Hole Economic Symposium hosted by the Kansas City Fed—focused on fostering a dynamic global economy—panelists discussed research showing that trade policy uncertainty can significantly influence employment and investment decisions beyond just direct changes in trade costs. Trade policy uncertainties affect supply chain organization, inventory management, and hiring practices.
Current measures based on media mentions and professional forecasts indicate that trade policy uncertainty has reached levels not seen for decades. Regional firms expect upcoming trade policy adjustments will increase their costs over the next year; most respondents believe this will push prices higher or significantly higher. However, views are mixed regarding future demand: some expect increased domestic demand due to protections while others anticipate lower demand from higher costs reducing competitiveness; many expect no change at all.
The distinction between firms’ cost expectations versus their outlook for demand illustrates how trade policy-related uncertainties differ from general economic or financial market volatility—they represent cost shocks influencing production decisions rather than just overall demand.
Looking forward, monitoring how different sources of uncertainty interact will remain important for businesses, policymakers, and households alike as they try to understand evolving risks facing the regional economy.
