Pandemic-Era Uncertainty on Main Street and Wall Street

Brent Meyer, Emil Mihaylov, Steven J. Davis, Nicholas Parker, David Altig, Jose Maria Barrero, and Nicholas Bloom
Working Paper 2021-2
January 2021

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Abstract: We draw on the monthly Survey of Business Uncertainty (SBU) to make three observations about pandemic-era uncertainty in the U.S. economy. First, equity market traders and executives of nonfinancial firms share similar assessments about uncertainty at one-year lookahead horizons. That is, the one-year VIX has moved similarly to our survey-based measure of (average) firm-level subjective uncertainty at one-year forecast horizons. Second, looking within the distribution of beliefs in the SBU reveals that firm-level expectations shifted towards upside risk in the latter part of 2020. In this sense, decision makers in nonfinancial businesses share some of the optimism that seems manifest in equity markets. Third, and despite the positive shift in tail risks, overall uncertainty continues to substantially dampen capital spending plans, pointing to a source of weak growth in demand and in potential gross domestic product.

JEL classification: L2, M2, O32, O33

Key words: business expectations, uncertainty, subjective forecast distributions

The authors thank the Federal Reserve Bank of Atlanta, the Alfred P. Sloan Foundation, and the University of Chicago Booth School of Business for financial support. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Brent Meyer, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.

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