How Uncertainty Varies Across Industries – And Why It Matters for the Economy
Events like wars, pandemics, or financial crises may inject uncertainty into the economic system. What this implies is that households may become unsure about their future labor income, or firms about their future profits. Often, an increase in uncertainty is associated with a slowdown of the economic system, a relationship that is both predicted by many models used by economists and present in the data. But is uncertainty equally felt across all parts of the economy? This is the central question explored in the paper ”Sectoral Uncertainty" by Efrem Castelnuovo of the University of Padova and his coauthors Kerem Tuzcuoglu and Luis Uzeda (both working for the Bank of Canada).
The authors take a closer look at how uncertainty varies across sectors and how that influences the business cycle. To do so, they introduce a new method to measure uncertainty using data from nearly 200 U.S. manufacturing industries, split into two big groups: those that make durable goods (like cars and appliances) and those that make nondurable goods (like food and clothes). Their approach allows them to separate uncertainty that affects the entire economy from uncertainty that is more specific to one sector.
Is uncertainty equal across sectors?
First of all, the authors find that industries producing durable goods are more sensitive to economic shocks. For example, uncertainty in this sector surged during the 2008 financial crisis, far more than in the nondurable sector. What this implies is that treating uncertainty as an homogeneous object has the economic profession has often done in recent years is problematic, given the potentially different impact of uncertainty on different sectors in a given economy.
Is the role of uncertainty actually different across sectors?
Digging deeper, the authors show that uncertainty in durable goods plays a much bigger role in driving overall economic fluctuations than previously thought. When households and firms become more uncertain about the future, they tend to delay big purchases and investment in productive capital - especially in items that are expensive, last a long time, and cannot be ”undone” to recup the invested money without facing a cost. Differently, and perhaps surprisingly, uncertainty in the nondurable goods sector can actually have a positive effect on the economy, possibly because it leads to more flexible consumer behavior or different investment decisions.
What are the implications of these findings?
The empirical findings discussed above carry important policy implications. Many economic policies - such as interest rate adjustments driven by monetary policy decisions - typically treat the economy as a homogeneous whole. However, this approach may overlook the specific vulnerabilities of certain sectors that are more sensitive to spikes in uncertainty. A “one-size-fits-all” response to uncertainty shocks may therefore be suboptimal. Instead, more targeted interventions - such as sector-specific fiscal transfers—could prove more effective in supporting the sectors most affected by such shocks.
