The COVID-19 pandemic has fostered uncertainty around the globe. Five metrics of uncertainty in the United States and the United Kingdom set records in the first few months of 2020, according to a team of 15 international researchers including Chicago Booth’s Steven J. Davis.

This helps explain the unprecedented economic fallout, since economists generally agree that uncertainty creates a drag on growth. The findings bode poorly for a swift recovery. High levels of uncertainty are “likely to depress investment, hiring, and the purchase of large-ticket consumer durables,” Davis says.

The economic crisis brought on by COVID-19 is unprecedented in at least two respects, the researchers write. First is its rapidity. In February 2020, the US unemployment rate was at a 60-plus-year low of 3.5 percent. By April, the rate was at an 80-year high of 14.7 percent.

Second, the economic fallout surpasses that of previous pandemics, even deadlier ones. The 1918 influenza pandemic killed an estimated 40 million people, or 2.1 percent of the world’s population, the researchers observe. The current COVID-19 death toll is modest in comparison, yet the plunge in economic activity so far is greater, they write.

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In these respects, “there is no close historic parallel to the COVID-19 contraction,” the researchers write. They used five forward-looking measures of uncertainty for the US and the UK to examine uncertainty levels before and after the crisis hit.

Stock market volatility: The researchers used the one-month and 24-month Chicago Board Options Exchange’s CBOE Volatility Index, known as the VIX, which measures expected future volatility of the S&P 500 Index. The one-month VIX went from just 15 in January 2020 to a peak of 82.7 on March 16—higher than the 80.9 recorded in October 2008 at the peak of the 2008–09 financial crisis.

Newspaper-based economic policy uncertainty: An economic policy uncertainty index developed by three of the researchers—Northwestern’s Scott R. Baker, Stanford’s Nicholas Bloom, and Davis—tracks the frequency at which the terms related to economics, policy, and uncertainty appear in 2,000 US newspapers. The indicator soared from about 100—considered average—in January 2020 to a record of more than 500 in March and April.

Twitter-based economic uncertainty: The researchers collected tweets from around the world containing the words economic and uncertainty and their variants, from January 1, 2010, to June 1, 2020. They found large spikes in such tweets amid the pandemic, with a peak from April 22 to 28.

Subjective uncertainty about future business growth: The researchers analyzed findings from the monthly Survey of Business Uncertainty, a sounding of US business executives that assesses managers’ confidence in their own sales projections. For the UK, the researchers used a similar measure, the monthly Decision Maker Panel. Both metrics showed major jumps in uncertainty in March and April 2020 before easing slightly in May.

In the UK, the percentage of businesses reporting that COVID-19 was “their single largest source of uncertainty” soared from around 25 percent in early March to nearly 90 percent in early April. The pandemic quickly replaced Brexit as the top-of-mind concern.

Forecasters’ disagreements on GDP growth: The US Survey of Professional Forecasters and the UK Survey of External Forecasters measure experts’ disagreements on year-ahead GDP projections. Both showed a historically high level of forecaster disagreement. Among US forecasters, disagreement rose from a standard deviation of 0.32 percentage points in the first quarter of 2020 to 2.74 percentage points in the second quarter—an eightfold increase. Among UK forecasters, disagreement levels rose from 0.49 percentage points to 10.1 percentage points in the same period—a 20-fold gain.

While all indicators showed huge spikes in uncertainty, the researchers find significant differences in amplitude among them. For instance, the 20-fold spike in UK disagreement about GDP dwarfed the 100 percent rise in both UK business uncertainty and the two-year VIX.

Indicators also peaked at different times. For instance, the VIX soared in late February, peaked in mid-March, and then fell by late March as stock prices began to recover. Broader measures, such as business growth uncertainty and newspaper-based economic policy uncertainty, peaked later before plateauing, highlighting the contrast between uncertainty on Wall Street and on Main Street.

While rising equity prices in the midst of the pandemic might seem incongruous, they may in part reflect investor expectations of a rapid recovery, Davis says. But for recovery to occur, a surge in new economic activity is necessary, and that isn’t likely amid the record levels of uncertainty.

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