As a note issued earlier in the month by the San Francisco Fed points out, this hasn’t always been the case. In the sharp downturn of 1981-82, uncertainty did not weigh as heavily. But, today, the Fed cannot use interest rates as a tool to try and get the economy going again.
The chart on the right takes data from a Thomson Reuters/University of Michigan survey of consumers in the US and the Confederation of British Industry (CBI) Industrial Trends to measure perceived uncertainty of consumers and businesses. The Michigan consumer survey asks respondents each month “whether they expect an ‘uncertain future’ to affect their spending on durable goods, such as motor vehicles, over the coming year.” The note suggests that uncertainty has pushed the unemployment rate up at least one percentage point in the last three years.
Although this can be taken with a pinch of salt – businesses don’t put hiring on hold because they are uncertain, they stop hiring because they think the economic situation will deteriorate – the trend can turn into a vicious cycle. Businesses don’t hire because they see bad times ahead, and businesses not hiring creates more bad times.
With the Fed seemingly unable to get the US labour market moving, this consumer uncertainty has indirectly driven market volatility. The chart on the right also plots the Volatility Index (Vix) – which tracks the cost of using options to insure against losses in the S&P500, and so acts as a measure of perceived volatility in the equity markets. Since the 2001 dot com crash, the two have traded closely.
What does all of this mean for traders? Vix is a useful instrument to use as a hedge against increasing volatility. But, when compared with consumer data, it also highlights the importance of the US labour market in the world economy. When a population of 314m stops spending, markets will get nervous. And traders looking for a way to predict market-moving US policy steps should keep an eye on these vital statistics.