Economic Policy Uncertainty Index for United States (USEPUINDXD)

TLDR

The Economic Policy Uncertainty (EPU) Index has shown major spikes in 1998, 2008, and 2020—each preceding significant economic downturns. The current 2025 spike, driven primarily by trade policy uncertainty under the new Trump administration, has reached record non-recession levels. With declining consumer confidence and slowing economic growth indicators, this pattern raises concerns about another possible recession despite the currently strong underlying economy.

The Economic Policy Uncertainty (EPU) Index is a measure designed to quantify uncertainty related to economic policy decisions and their potential impacts. Developed by economists Scott Baker, Nicholas Bloom, and Steven Davis, it aims to track policy-related economic uncertainty over time.

The index captures uncertainty through several key components:

  1. News-based uncertainty: Tracks the frequency of newspaper articles containing terms related to economy, policy, and uncertainty. For the US version, this involves analyzing 10 major newspapers including The Wall Street Journal, The New York Times, and others.

  2. Tax code expiration data: Measures uncertainty related to the future tax code by counting federal tax code provisions scheduled to expire.

  3. Economic forecaster disagreement: Quantifies disagreement among professional forecasters regarding future inflation and government purchases.

The EPU Index has become an important tool for economists, policymakers, and investors to assess how policy uncertainty might affect economic activity, investment decisions, and market volatility. Research has shown that increases in policy uncertainty are associated with reduced investment, hiring, and economic growth.

The index typically spikes during major economic and political events such as presidential elections, debt ceiling disputes, major financial crises, and global events like Brexit or the COVID-19 pandemic. These spikes reflect periods when businesses and households face greater difficulty in predicting future economic policies.

Significant economic downturns or recessions followed the major EPU index spikes in 1998, 2008, and 2020.

1998 Spike and Aftermath

The 1998 spike in economic policy uncertainty coincided with the Russian Financial Crisis and Asian Financial Crisis, which caused significant economic damage in the region. In Malaysia, the construction sector contracted 23.5%, manufacturing shrunk 9%, and the overall GDP plunged 6.2% in 1998. The crisis affected multiple countries, with South Korea, Indonesia, and Thailand being the hardest hit. The rate of growth in world merchandise exports slowed to 3.5% in 1998, from over 10% in 1997. The Philippines experienced its first recession in many years, with the economy contracting in 1998.

2008 Spike and Aftermath

The 2008 spike was followed by the Great Recession, one of the most severe economic downturns since the Great Depression. From its peak in Q2 2007 to Q1 2009, household wealth in the United States fell by $11 trillion. In the fourth quarter of 2008, the quarter-over-quarter decline in real GDP in the U.S. was 8.4%. The U.S. unemployment rate peaked at 11.0% in October 2009, roughly twice the pre-crisis rate. The crisis rapidly spread globally, resulting in bank failures, plummeting stock prices, and significant declines in international trade.

2020 Spike and Aftermath

The 2020 spike in economic policy uncertainty during the COVID-19 pandemic was followed by a sharp but relatively brief recession. In March 2020, economic policy uncertainty in the U.S. reached its highest level since 1985. This uncertainty shock appeared much larger than those associated with 9/11 or the 2008-09 financial crisis. The cumulative decline in economic activity during the first two quarters of the 2020 recession was somewhat larger than the GNP decline during the first two quarters of the Great Depression. Total civilian employment fell by 21.0 million from Q4 2019 to Q2 2020, while the unemployment rate more than tripled from 3.6% to 13.0%. However, unlike previous recessions, the 2020 contraction was both extremely sharp and relatively short-lived.

In all three cases, the EPU spikes were either concurrent with or slightly preceded significant economic contractions, supporting the connection between policy uncertainty and economic downturns.

2025 Spike

The current spike in the EPU Index is primarily being driven by trade policy uncertainty under the newly implemented Trump administration. The index has recently reached "the highest levels on record outside of recessionary periods".

Several key factors are contributing to this uncertainty:

  1. Implementation of a 10% additional tariff on imports from China, which has already been incorporated into economic forecasts.

  2. Discussions about potential additional tariffs on Canada and Mexico, which have triggered stronger financial market responses than the China tariffs.

  3. Broader concerns about intensified protectionist policies that could "lower investment, reduce market efficiency, and disrupt supply chains".

The impact of this uncertainty is already becoming evident in economic data:

This trade policy uncertainty is occurring against a backdrop of other global uncertainties including "geopolitical conflicts, extreme weather events, societal and political polarisation, and technological advancements", all contributing to the elevated EPU levels.

While a strong underlying economy provides some buffer, the evidence suggests that sustained policy uncertainty typically leads to reduced investment, hiring freezes, and eventual economic contraction. The coming months will reveal whether policymakers can stabilize the economic environment or whether the current uncertainty spike will join its predecessors as a harbinger of recession.