Measuring Business-Level Expectations and Uncertainty: Survey Evidence and the COVID-19 Pandemic

Utilizing a unique firm-level survey in Japan which contains 5-bin forecasts for micro-and macro-level variables and information on firm sentiment, we document three interesting findings. First, firm-level subjective uncertainty (i.e., variance of forecasts) is highly positively related to firm growth volatility and negatively affects firm hiring and investment decisions. This is true even after controlling for past and expected firm sales growth. Second, micro-level uncertainty (i.e., variance of forecasts of firm sales) is highly positively related to macro-level uncertainty (i.e., variance in forecasts of GDP growth rate and the exchange rate). Finally, roughly 20% of firms report that they are not using expected average sales and profits as the base for investment and hiring decisions (i.e., either pessimistic or optimistic). Firms that face higher uncertainty are more likely to be optimistic and optimism positively affects firm hiring decision. In addition, the sudden escalation of the COVID-19 pandemic in January 2020 led to a substantial increase in firms' subjective uncertainty. This effect is especially large for Japanese firms that have direct exposure to China through supply chains and foreign direct investment.