119. Stock Markets, the Economy, and Trump’s Trade Policy Uncertainty

Episode Summary

Executive Summary: The episode examines how uncertainty affects economic behavior and trade policy, with Nick Bloom explaining that uncertainty slows investment, hiring, and spending through risk aversion and “real options” waiting. He discusses evidence from newspaper-based uncertainty indices, trade-policy uncertainty’s sharp rise under Trump, and survey work suggesting measurable though modest economic costs.

Main Topics: How uncertainty affects the economy (Priority: 5/5): Bloom explains the two main channels: risk aversion and real options. When uncertainty rises, firms and households delay investment, hiring, and spending, causing a temporary slowdown. Evidence linking uncertainty to slower growth (Priority: 5/5): The discussion reviews empirical findings showing a strong correlation between higher uncertainty and lower growth, especially weaker investment, while emphasizing the difficulty of proving causation. Building the Economic Policy Uncertainty Index (Priority: 4/5): Bloom describes how the index was created from newspaper frequency counts of uncertainty terms combined with policy references, enabling real-time measurement and historical backcasting. Trade policy uncertainty under Trump (Priority: 5/5): Trade policy uncertainty is portrayed as a major recent change, with a dramatic spike under Trump after decades of relative quiet, making it a large share of overall policy uncertainty. Survey evidence from the Atlanta Fed and Bank of England (Priority: 4/5): Bloom discusses firm surveys that directly ask about uncertainty and its effects, finding negative impacts on investment, especially in manufacturing and construction. Uncertainty and stock market jumps (Priority: 3/5): The conversation covers Bloom’s research on what drives major stock market moves and how trade became a much more important explanatory factor during the Trump years. Is trade uncertainty special? (Priority: 4/5): Bloom argues trade uncertainty is not fundamentally different from other policy uncertainty; its effects resemble those of monetary, fiscal, and geopolitical uncertainty.

Key Arguments: Uncertainty causes firms and households to wait, reducing investment, hiring, and consumption. Risk aversion makes borrowing and spending more costly when uncertainty rises. The real-options mechanism explains why delaying decisions becomes valuable under uncertainty. There is a strong correlation between uncertainty and weak growth, but causality runs both ways. Historical examples like Brexit suggest uncertainty can materially depress investment. The Economic Policy Uncertainty Index uses newspaper mentions because they are timely and historically available. Trade policy uncertainty was historically minor but surged sharply under Trump, becoming a major component of policy uncertainty. Survey evidence suggests trade uncertainty lowered investment by roughly 1% and GDP by about 0.2%–0.3%. Manufacturing and construction were the sectors most affected by trade uncertainty. Stock market jump analysis shows trade became a major driver of market moves only under Trump, not in earlier decades. Bloom believes trade uncertainty behaves like other forms of uncertainty rather than being economically unique.

Data Points: U.S. trade policy uncertainty share: About 20%–30% of EPU articles - Bloom says trade-related uncertainty rose from about 1% of coverage five to ten years earlier to roughly a quarter of articles under Trump. Trade policy uncertainty pre-Trump: Near zero for decades; last major rise in early 1990s around NAFTA - Used to show how unusual the recent surge is compared with the historical record. Survey panel size: Around 1,000 firms - Atlanta Fed Survey of Business Uncertainty sample size described by Bloom. Estimated trade impact on investment: About 1% cut - Bloom cites survey findings on firms’ reported investment reductions due to trade uncertainty. Estimated trade impact on GDP: About 0.2% to 0.3% of GDP - Bloom notes these are noisy but material estimates of the aggregate effect. U.S. GDP growth context: Around 2% per year - Used to illustrate that a 0.3% hit is economically meaningful. Stock market jump threshold: More than 2.5% up or down in a day - Bloom’s definition of a major market jump in the U.S. study. Stock market jump sample: 1,200 U.S. jumps since 1900 - From newspaper-based attribution analysis of market moves. Global stock market jump sample: About 2,000 jumps in other countries - Broader international extension of the same study. Drivers of stock market jumps: Macro news 25%, company earnings 20%, unknown 15% - Categories identified from newspaper explanations of daily market moves. Trade as stock-jump driver pre-2017: 0 jumps from 1940 to 2017 - Bloom emphasizes trade was not a meaningful driver for decades. Trade as stock-jump driver under Trump: About 40% of jumps; five jumps cited - Shows trade became a major market driver after 2017. Trade jumps in the last year of the study: More than half - Indicates trade’s growing salience in recent market moves.

Pivotal Quotes: "The main way we think uncertainty matters is it leads firms and consumers to pause what they're doing." — Nick Bloom: Explaining the core economic mechanism behind uncertainty. "Trade policy uncertainty is in some ways graphically the most amazing index because it's like a dead topic." — Nick Bloom: Describing the historical pattern of trade uncertainty before the Trump era. "I actually don't think that trade uncertainty is particularly different from other types of uncertainty." — Nick Bloom: Answering whether trade policy uncertainty is economically special.

Implications: Listeners should expect uncertainty to depress investment and spending across sectors, with trade shocks especially relevant when policy is volatile. For firms, planning and capital spending may slow; for policymakers, clearer guidance can reduce economic drag.