Why the economy feels so confusing right now

Hello Sunday Free Lunchers. Disagreement is common among macro and financial market watchers. But this year my inbox has been filled with particularly contrasting takes and forecasts from traders, economists and analysts.

This was reflected in readers’ questions in the FT Ask an Expert session with Martin Sandbu and me last week. Many queries focused on mixed signals in the global economy and stock markets.

So this week, I go meta and attempt to explain why we’re all so confused.

Confusion shows up in the data.

In the US, the average standard deviation of GDP growth projections by professional forecasters for 2025 and 2026 has been higher than in pre-pandemic years, according to data compiled by Consensus Economics.

Similarly, research by BNP Paribas Fortis shows that forecast disagreement for Eurozone economic growth — which usually converges as the year progresses — has actually risen this year.

Dissent among rate-setters has increased, too. Minutes of the US Federal Reserve’s September meeting highlighted a swath of views on America’s economic outlook. Division has been persistently high at the Bank of England over the past 18 months, according to Deutsche Bank analysis.

The muddled macro environment is also reflected in financial markets.

The dual rally in stocks and gold in part indicates investors’ strong risk appetite and their desire for protection against unpredictability.

The Vix index — a measure of stock market volatility — tends to correlate with measures of economic uncertainty. But the two have decoupled this year. Such disconnects can occur, among other reasons, when uncertainty is so high that investors struggle to price it in, notes Matt King, founder of Satori Insights.

So, what’s behind the confusion? There are four broad explanations.

Data is one factor. Across advanced economies, response rates to headline economic surveys have been declining in recent years.

In March, the FT-Booth survey of economists found that 90 per cent of respondents had concerns about the quality of US economic data.

And currently in the US, the government shutdown has prevented the release of national statistics, shifting market-watchers’ focus to sometimes contradictory private data sources. The FT’s markets columnist Katie Martin also notes signs of self-censorship among economists and investors to avoid the White House’s ire.

Second, global economic policy uncertainty has reached record highs this year. In many advanced countries, political instability and shaky public finances obfuscate the fiscal and monetary policy path.

President Donald Trump’s economic programme — including raising the US’s average effective tariff rate to its highest in 90 years, toying with central bank independence and dramatically curbing immigration — has little precedence.

His administration has also weaponised uncertainty around this agenda — for instance with deadlines, exemptions and conditions — making it even harder to model. The lack of clarity over whether the president will impose the newly threatened additional 100 per cent tariffs on China is a case in point. Given America’s economic heft, all this unpredictability is felt internationally.

“It is difficult to have a base case,” says Alexander Saunders, head of global quant macro strategy at Citi. “The best approach in this situation is often to stay broadly invested in risky assets and to wait and see.”

“In this way, high risk appetite and uncertainty can coexist,” he adds.

Third, the global economy is encountering structural changes that aren’t easy to price. Shifting geopolitical trends and trading patterns are one. Most topical right now are efforts to gauge the transformative potential of artificial intelligence.

“There is a split between those who think AI is simply a bubble, and those that think it is nirvana,” notes Jonas Goltermann, deputy chief markets economist at Capital Economics.

In the US, business AI adoption rates appear to have dipped in recent months, particularly within large firms. This echoes a recent Massachusetts Institute of Technology study that found 95 per cent of companies had seen no gains from their AI investments. That said, a rising number of firms still expect to increase their usage of the technology in the near future.

The disconnect between the limited short-term effects of Trump’s paradigm-shifting policies and their high, long-run economic implications adds confusion. Indeed, the impact of high tariffs and a reduced supply of foreign workers on growth potential increases over time.

“Narrative churn is elevated right now,” says Ed Al-Hussainy, fixed-income portfolio manager at Columbia Threadneedle Investments. “Fears of recession, AI hype and America’s safe haven status are constantly flickering on and off.” 

These three factors feed into the fourth driver of macro confusion: so-called K-shaped trends. These describe the prevalence of positive economic drivers (the upward stroke of the K) with offsetting negative ones (the downward stroke).

“There are lots of diverging or ‘K-shaped’ themes going on within the economy and market,” says Liz Ann Sonders, chief investment strategist at Charles Schwab. “This makes simple narratives more prone to errors of judgment.”

These are most evident in the US. I outlined some instances in the September 7 edition of this newsletter: booming vs struggling states, AI vs non-AI capital expenditure, and upper- vs lower-income households’ spending.

Another example is how negative tariff shocks on the S&P 500 have been offset by upbeat non-tariff news, including excitement about AI and solid earnings reports.

During the Q&A on Thursday, many asked how US economic activity had remained buoyant despite weakness in the labour market, which would usually trigger recession warnings. Part of the answer is the counteracting effects of capital expenditure on AI-related infrastructure.

Likewise, some point to the decline in immigration as a sign that the drop in US jobs growth could be supply rather than demand driven, and hence less worrying, notes Capital Economics’ Goltermann. 

These “K-shaped” dynamics make it difficult to determine net effects, driving macro uncertainty. But they also mean debates become more polarised.

Sometimes the muddle is generated by focusing on the wrong statistic. Many point to the limited pick-up in core inflation measures to suggest that Trump’s tariffs are having minimal impact on prices. But these aggregate indices shroud clear price pressures in import-dependent goods.

The end result is confusion. Economists and investors, depending on their vantage point, can look at the same economy and land on a broad range of views.

The US economy seems both resilient and fragile, Trump’s policy agenda appears at once disruptive and oddly inconsequential, and markets feel euphoric yet uneasy. Schrödinger’s economy, then (in that all observations can be true simultaneously).

In such an environment, having strong convictions can be costly. Wading through the muddle of macro narratives requires us to dig deeper into wider data sources, question our priors, and accept that some contradictions can reveal the truth.

Send your thoughts to freelunch@ft.com or on X @tejparikh90.

Food for thought

This editorial by Nature calls for an end to “GDP mania” and outlines what a better metric for prosperity might include.

Free Lunch on Sunday is edited by Harvey Nriapia