Will Trumpian Uncertainty Knock the Economy Into a Recession?
There is only so much policy chaos that households, businesses, and financial markets can take.
By
John Cassidy
March 10, 2025
Economists have long recognized that when the future is foggier than usual, consumers and businesses may put off making big purchases. John Maynard Keynes, in his famous tome “
The General Theory of Employment, Interest, and Money,” which was published in 1936, referred to “the abnormal situation, where the propensity to consume may be sharply affected by the development of extreme uncertainty.” In an influential 1980 research paper, the former Fed chairman Ben Bernanke, who was then a young economist at Stanford, focussed on the costly and irreversible capital investments, such as building a new factory or buying new machinery, that firms make. A rise in uncertainty may prompt them to put these projects on hold until things become clearer, Bernanke pointed out. And if many businesses find themselves in the same position, over-all capital expenditures, also known as capex, can be hit, “driving the economy into a period of reduced output.”
That sounds intuitively plausible, but how can we measure uncertainty? An English economist named Nick Bloom, who now teaches at Stanford, has spent nearly thirty years trying to answer this question. In his Ph.D. thesis, which he completed in 2001, Bloom used the
VIX Index, a commonly cited measure of volatility in the stock market, as his metric for uncertainty. (When stock prices bounce around, the
VIX goes up; when they remain pretty steady, the
VIX goes down.) Looking at the historical data, Bloom found that some big spikes in the
VIX were correlated with major political events, including
the assassination of J.F.K. and the start of the first Gulf War. But Bloom was well aware that Wall Street isn’t Main Street. Ideally, he wanted to find a measure of uncertainty that captured popular sentiment and also reflected the policy environment.
Working with two other economists—Scott R. Baker, of the Kellogg School of Management, at Northwestern, and Steven J. Davis, of the University of Chicago’s Booth School of Business—Bloom came up with such a measure. After accessing the online archives of ten leading newspapers across the country, the three researchers counted the frequency with which words like “uncertainty” and “economy” occurred in news stories together with policy terms like “deficit,” “Federal Reserve,” or “White House.” The idea was that if uncertainty about policy was rising, newspaper reports would reflect it. The researchers dubbed the resultant series, which analyzed data going back to 1985, the Economic Policy Uncertainty (E.P.U.) index, and, using statistical methods, they showed that big jumps in the index foreshadowed periods of economic weakness. In another exercise, they examined the archives of six newspapers going back more than a century and found, broadly, the same pattern.
“There is a lot of evidence that uncertainty slows the economy: it leads businesses to pause investment; it leads consumers to pause on spending,” Bloom told me last week, when I called him up to discuss Trumpian uncertainty. In the past few weeks, the E.P.U. index has risen to a level surpassed only during the early days of the
COVID-19 pandemic, when the U.S. economy virtually closed down. The E.P.U. index is now higher than it was after 9/11; or during the October, 2008, financial crisis, when the banking system nearly collapsed; or during the debt-ceiling deadlock in 2011.
Perhaps this isn’t surprising. Since
the Inauguration, Trump has been going back and forth on tariffs. On the day we spoke, the White House had announced a one-month reprieve for automakers from duties of twenty-five per cent on all goods imported from Mexico and Canada. The next day, it announced further concessions, excluding all goods traded under the 2020 U.S-Mexico-Canada Agreement. But other tariffs remain in place, including a ten per cent levy on Canadian exports of oil and gas, and Trump’s aides are still planning an April 2nd rollout of new “reciprocal tariffs,” which seemingly will be imposed on imports from countries all over the world. (“Welcome to the Trump tariff thrill ride, where you never know what’s going to happen next,” an editorial in the
Wall Street Journal quipped.)
After a shaky couple of weeks in the financial markets, there are growing concerns that chronic uncertainty is already hurting the economy. In February, the Conference Board’s index of consumer confidence dropped sharply. As yet, there isn’t much systematic evidence on how business spending has been affected. But on Wall Street, “some are beginning to throw around the dreaded R word,” Bloomberg reported.
When I asked Bloom how he interpreted the recent spike in the E.P.U. index, he replied, “It certainly increases the probability of a recession.” Channelling Bernanke, he went on, “If every firm out there stalls on its investment and pulls back on research and development, we
will have a recession.” Bloom added that the most negatively affected industries could be capital-intensive ones, like energy, utilities, and manufacturing, which have the most reason to exercise caution. “If I’m planning to build a new factory or energy plant, the life of these investments is twenty-five years,” Bloom said. “Now things are changing rapidly; tariffs are on one day and off the next. You are, like, God, I can’t deal with that. I’m just going to wait until it settles.”
The Trump tariffs aren’t the only shock to a U.S. economy that entered 2025 growing steadily. Bloom suspected that the decline in consumer confidence was linked to the uncertainty about the extent of the purge of federal workers being carried out by Elon Musk’s Department of Government Efficiency. “One of the classic factors causing uncertainty among individuals is unemployment,” he said. The Labor Department’s jobs report for February, which was released on Friday, showed that the economy created a hundred and fifty-one thousand jobs last month, a solid figure. But the survey of employers on which it is based was carried out during the week of February 12th. On the
DOGE and tariffs fronts, a lot has happened since then.
The official survey for March will be carried out this week, but we’ll have to wait until April 4th for its results. In the meantime, economists will be closely monitoring other economic indicators, including reports on retail sales and orders for durable goods, to see whether the spike in uncertainty is filtering through into lower spending. “The biggest downside risk is that policy uncertainty could create a sudden stop in the economy where consumers stop buying cars, stop going to restaurants, and stop going on vacation, and companies stop hiring and stop doing capex,” Torsten Slok, the chief economist at Apollo, a big private-equity and asset-management firm,
wrote last week.
Bloom described the current situation as “totally unprecedented.” Going back to the fatal shooting of William McKinley, Trump’s favorite President, in 1901, every spike in uncertainty that Bloom has tracked was associated with a “bad news” event, such as a financial crisis, a political assassination, or an outbreak of violence. But going into this year, he pointed out, many people in the business community viewed Trump’s election victory as positive news, believing that it would herald the introduction of pro-business policies, including deregulation and the extension of corporate tax cuts. On Wall Street, there was talk of a revival in “animal spirits”—a term coined by Keynes. Seven weeks of Trumpian chaos appears to have dented the sentiments of consumers and businesses. “It’s really a battle of two forces,” Bloom remarked. “On the one hand, businesses seem to think that, on net, Trump is good for the economy. But they don’t like this incredible uncertainty.”
In theory, the President could alleviate some of these concerns by deciding on a course of action and sticking with it. Thus far, he seems to be revelling in his ability, on a daily basis, to court controversy, generate uncertainty about his ultimate goals, and monopolize the daily news cycle. “A lot of politicians want to be seen as stable, whereas Trump wants the reverse,” Bloom noted. To some of his supporters, his unpredictability is clearly an element of his appeal. But there is only so much chaos and uncertainty that households and businesses and financial markets can take. And since January 20th, Trump has been pushing them to the limits.
“What we are still trying to understand is the magnitude of the shock,” Slok told me. “What are the sizes of the tariffs and the
DOGE layoffs? If you give me that information, I can use it to run some simulations and see what happens to the economy. But it isn’t just the magnitude of the shock that is unclear. It is also the duration. How long will it last? Without that information, it’s very difficult to look forward.” And, as Keynes and Bernanke noted, a capitalist economy that can’t look forward is one that can’t function properly. ♦
There is only so much policy chaos that households, businesses, and financial markets can take.
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