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Home » Trump’s Economic Policy Chaos Could Dampen The Economy
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Trump’s Economic Policy Chaos Could Dampen The Economy

News RoomBy News RoomMarch 18, 20250 Views0
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A massive jump in economic policy uncertainty, highlighted by President Donald Trump’s on-again-off-again tariffs and other policy back and forth, has characterized the first few months of his second term. Above average increases in economic policy uncertainty tend to precede slower increases in economic activity. And, the more than 140.2% of economic policy uncertainty from October 2024 to February 2025 certainly counts as an above average increase.

Researchers at Chicago, Northwestern and Stanford University have pulled together a lot of information to capture different aspects of economic policy uncertainty. The index relies on information in news reports, disagreements among economic forecasters and the number of tax code provisions that will expire in the future. The combined monthly index generated from these three sources dates back to 1985. This is enough information to compare this uncertainty index with other monthly measures of economic activity.

A few points are crucial to keep in mind about this index and what it can tell us about the economy. First, the index can jump around a lot. It thus makes sense to average correlations between the uncertainty index and other relevant economic measures over long periods of time. This is straightforward with four decades worth of data. Second, economic policy uncertainty increased after 2000. It thus makes sense to use 12-month changes in the index rather than levels of the index to avoid having comparisons skewed by the secular uptick in economic policy uncertainty. Third, the economic consequences of heightened uncertainty will likely show up with a delay. Businesses will hold off on investments and consumers will delay purchases, but such changes typically cannot happen overnight. Fourth, the once-in-a-century pandemic created extreme policy uncertainty. It is hence best to compare changes in economic policy uncertainty to typical changes before the pandemic, that is, from January 1985 to February 2020. The typical 12-month growth rate of the Economic Policy Uncertainty index was 0.4% during that period. In sum, it is informative to look at how key monthly measures of economic performance did over the 12 months after the uncertainty index grew more or less than its long-term average over a 12-month period.

Three key monthly economic measures are differences in payroll employment growth, industrial production and consumer spending. All three measures show slower growth during the twelve months after the index grew above average over a one-year period. For example, a jump in economic policy uncertainty above its long-term average growth rate during 12 months is followed by slower payroll growth a year later. The average growth of payroll employment was 0.8% and the median payroll growth rate was 1.5% during the year after an above-average jump in uncertainty, while it was 1.7% at the average and 1.8% median during the years after a below-average increase in uncertainty. At a minimum, job growth seems 0.3 percentage points slower in the year after heightened economic policy uncertainty. This may seem like much, but in the current situation this would equal almost 480,000 jobs that are not created following a period of heightened uncertainty.

Industrial production and consumer spending also grew more slowly after periods of heightened economic policy uncertainty. Industrial production grew on average by 0.8% after above-average increases in economic policy uncertainty compared to 2.9% after below-average changes in uncertainty, i.e. calmer, more predictable periods. At the median, the difference was 2.1% compared to 2.9%, which still signals more than 25% slower changes in industrial activity. And, the difference in average inflation-adjusted consumption spending growth – likely following drops in consumer sentiment — was 2.7% after heightened uncertainty and 2.9% (and 2.6% compared to 3.1% at the median).

A simple lagged calculation suggests that a jump in economic uncertainty precedes a slowdown in economic activity with less industrial activity, slower hiring and a pullback in consumer spending. Muddying the picture of where economic policy may be headed, as is currently happening, could slow the growth of key parts of the economy. It is a self-inflicted damper on economic growth that can translate into fewer jobs, among other negative consequences.

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