A WORLD OF UNCERTAINTY: GLOBAL CONCERN ABOUT ECONOMIC POLICY IS AT RECORD HIGHS

As the U.K. responds to voters’ rejection of the European Union, the U.S. presidential election comes to a head and other disputes play out across the globe, uncertainty is at a record high in 2016, according to a new index that tracks newspaper articles in over a dozen countries.

The index is a measure of economic sentiment that rises and falls with major events like the 9/11 attacks and the 2009 global financial crisis.  CLICK HERE TO SEE CHARTS OF INDIVIDUAL COUNTRIES
The newspaper indexes aren’t the only text source that shows an increase in uncertainty in recent years, according to the researchers. The concept was tested by comparing the newspaper data to similar methodologies using the Fed’s Beige Book reports, the risk factors listed in company earnings reports and the CBOE Volatility Index.

Those sources painted a similar picture to the newspaper index — policy-related uncertainty has generally been growing since around 2008. Newspapers are a robust data source because many of their databases stretch back for many decades and are updated on a daily basis.

The indexes are formed by counting the proportion of news stories that meet three criteria: they have to relate to the economy, policy and uncertainty. Not only does the news reflect the worries of the time, but news stories can also change how people think.

“Newspapers are imperfect mirrors of reality,” said Steven Davis, a professor at the Booth School of Business at the University of Chicago and the author of the latest paper on the index project. “They pick up some of the information about sentiment and outlook that may not be captured by traditional sources, but they also shape people’s perceptions of reality.”

A world of trouble

Uncertainty about how policy-makers will affect the economy can lead to underinvestment by firms, reduced hiring and slowed consumer spending.

In the last five years, the average global uncertainty index has been about 60 percent higher than in previous years, surpassing even the period around the 2008 housing crisis and recession. Most of the recent increases have been driven by events in other nations — most notably the Brexit decision, which caused a massive spike in Europe and was felt as far away as Japan. (See annotated versions of the indexes with major events marked on the project’s website.)

Brazil is facing a down economy, a spate of corruption charges and the impeachment of its president. Turkey recently blocked a coup and had its credit rating downgraded, while military conflicts, political changes and other disputes have raised policy questions in Russia, China and Syria. Those economic uncertainties can influence short-term hiring decisions, as well as long-term plans for factory construction or expansion.

“The elevated levels of global policy uncertainty in the past five years compared to even the crisis years of 2008-09 is remarkable,” Davis wrote in the paper. “They have contributed to the disappointing performance of the global economy in recent years. By how much is an open question and an active area of research.”

The indexes are designed to be be a measurement that can be used to answer research questions about how uncertainty plays into long-term changes in the economy. But the timely information they provide is also used by hedge fund managers and other market participants to make decisions. Firms like BlackRock have used the concept to construct their own in-house indexes, Davis said.

“There is a lot of information about economic sentiment that doesn’t get totally reflected in standard economics statistics,” Davis said. “Newspapers have been around for decades in essentially their current form, so once it can be read in an automated manner it’s a tremendous data source just waiting to be tapped that has been largely unused.”

CNBC

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