Working Paper: NBER ID: w25956
Authors: David Altig; Jose Maria Barrero; Nicholas Bloom; Steven J. Davis; Brent H. Meyer; Nicholas Parker
Abstract: We elicit subjective probability distributions from business executives about their own-firm outcomes at a one-year look-ahead horizon. In terms of question design, our key innovation is to let survey respondents freely select support points and probabilities in five-point distributions over future sales growth, employment, and investment. In terms of data collection, we develop and field a new monthly panel Survey of Business Uncertainty. The SBU began in 2014 and now covers about 1,750 firms drawn from all 50 states, every major nonfarm industry, and a range of firm sizes. We find three key results. First, firm-level growth expectations are highly predictive of realized growth rates. Second, subjective uncertainty is highly predictive of forecast errors and the magnitude of future forecast revisions. Third, subjective uncertainty rises with the firm’s absolute growth rate in the previous year and the extent of recent news about its growth prospects. We aggregate over firm-level forecast distributions to construct monthly indices of business expectations (first moment) and uncertainty (second moment) for the U.S. private sector.
Keywords: Business Uncertainty; Subjective Probability Distributions; Economic Decision-Making
JEL Codes: D20; E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm-level growth expectations (D25) | realized growth rates (O49) |
| subjective uncertainty (D80) | forecast errors (C53) |
| recent growth rates (O49) | subjective uncertainty (D80) |
| extent of recent news about growth prospects (E66) | subjective uncertainty (D80) |