World Uncertainty Indices, Financial Markets, and U.S. GDP Growth

Abstract

We investigate whether the world uncertainty indices (Ahir et al. 2022) derived from the Economist Intelligence Unit (EIU) country reports provide superior forecasting ability for U.S. GDP growth in comparison to stock and bond market indicators. Our hypothesis is that if there is a report of uncertainty in the press, equity and bond traders are likely to be aware of it, and the trading data for securities may reflect this uncertainty. We use different indicators, such as corporate bond credit spreads measured from unsecured corporate bond trading data, to forecast U.S. GDP growth. During the 1990-2022 sample period, we find that U.S. stock market returns predict U.S. GDP growth more accurately than the world uncertainty indices. Excluding the Covid-19 period, we find that U.S. corporate bond credit-spreads and stock market returns exhibit superior forecasting performance compared to the world uncertainty indices. These results underscore the significance of financial market indicators in comparison to EIU reports for assessing the future state of the U.S. economy.