Uncertainty and Economic Activity: Evidence from Business Survey Data

This paper uses survey expectations data from both Germany and the United States to construct empirical proxies for time-varying business-level uncertainty. Access to the con?dential micro data from the German IFO Business Climate Survey permits construction of uncertainty measures based on both ex-ante disagreement and on ex-post forecast errors. Ex-ante disagreement is strongly correlated with dispersion in ex-post forecast errors, lending credence to the widespread practice of proxying for uncertainty with disagreement. Surprise movements in either measure are associated with signi?cant reductions in production that abate fairly quickly. We extend our analysis to US data, measuring uncertainty with forecast disagreement from the Business Outlook Survey administered by the Federal Reserve Bank of Philadelphia. In contrast to the German case, surprise increases in forecast dispersion lead to large and persistent reductions in production and employment.