This is an axiom heard countless times in business schools of business schools and on business profits: uncertainty is bad for business.
The American economy is about to test this proposal like never before.
The first weeks of the second Trump Administration were a dizzying whirlwind of economic policy movements: a freezing of expenses was declared and then canceled. Federal programs, and even whole agencies, have been suspended or closed. Prices have been threatened, announced, canceled, delayed or promulgated – sometimes in a few days, or even hours. The measures of the uncertainty of economic policy have skyrocketed at the levels normally associated with recession and global crises.
Business leaders – many of whom applauded President Trump’s electoral victory, expecting a drop in taxes and a reduction in regulations – were left to shake their heads.
“Your supposition is as good as mine which is going on in Washington,” said Nicholas Pinchuk, managing director of the car manufacturer, Snap-on.
“So far, what we see is a lot of costs and a lot of chaos”, Jim Farley, Managing Director of Ford Motor, said investors at a conference in New York this week.
“It’s as if your head was running with what’s going on – you never know,” said Chad Coulter, founder and managing director of Biscuit Belly, a chain of breakfast restaurants based in Louisville, Ky.
However, for all their concerns, the three heads of management say that they are growing forward with planned investments and that they feel good in their perspectives. The same goes for many of their peers: measures of the confidence of companies climbed after the elections, and although there are clues that Gleam finished to a certain extent, the business leaders, in As long as a group remain optimistic.
A gauge in the feeling of small businesses of the National Federation of Independent Businesses fell in January, but remained higher than in any month of the Biden administration.
“You really have a battle between a greater commercial optimism and greater commercial uncertainty, and it is sort of opposite forces,” said Nicholas Bloom, a professor of the University of Stanford who studied how uncertainty affects the economy.
But even the sympathetic business leaders to the new administration warn that confidence could fade if the agitation in Washington is not relatively quickly – especially if the Republicans seem to have trouble concluding agreements on their legislative priorities.
For many members of the National Federation of Independent Businesses, the priority is to preserve a tax relief from small businesses that should expire at the end of the year, said Jeff Brabant, head of federal government relations of the organization.
“We are in February and people are optimistic and they give a chance to the new regime in power,” said Mr. Brabant about the prospects for an agreement from the Congress to extend the provision. “If we arrive in the fall and we arrive in October, November, and that there was no problem, that is at that time, I think that people would begin to become very nervous. “”
Uncertainty costs
In recent years, economists have tried to study the effect of uncertainty with academic rigor, by developing measures to assess the phenomenon in time and in all countries. Their research has constantly revealed that uncertainty makes companies more reluctant to hire and invest, and leads to a drop in sales – beyond the impact of policies.
“Uncertainty itself is harmful to commercial activity,” said Steven J. Davis, Stanford economist who studied the issue. When the rules change, even in a harmful way, companies can generally adapt, he said. But when it is not clear what the rules will be, companies can be found in limbo.
Kim Vaccarella discovers that from the first hand. His company based in New Jersey, Bogg Bag, manufactures bright colors, which are made in China and sold at Target, Bloomingdale and other stores.
New prices on imports from China could add $ 2.50 to the wholesale cost of each bag, a significant increase for a product which is generally sold from $ 55 to $ 100. Ms. Vaccarella recently went to Sri Lanka and Vietnam to explore the movement of her production there – but it is difficult to make such a decision when commercial policies change every week.
“It is only one of those delicate places to be, with, you know: how to go from here?” She said.
The uncertainty of economic policy has increased sharply since the elections, according to a hint Developed by Mr. Davis, Mr. Bloom and Scott Baker, economist at the Northwestern University. The recent increase has been unusual: past points have been associated with recession, financial crises or other global developments.
“Traditional uncertainty shocks occurred after world negative events,” said Bloom. “In this case, it is almost like a deliberate decision to increase uncertainty.”
This makes it difficult to predict how companies will react. It is possible, said Mr. Bloom, which they will bet on a relaxation of uncertainty and will focus on the potential advantages of a Trump presidency. He noted that investors seemed mainly worried by the Washington news torrent: volatility measures of the financial market have generally been docile since Trump took office.
But managers are likely to be careful of making long -term investments, said Mr. Bloom – in particular those who are difficult to reverse, such as moving a factory, or who take a long time to pay, such as investments in research and development.
Withdraw
Mr. Pinchuk, from Snap-on, said that he had already seen signs of caution among customers, who include both car repair workshops and individual mechanisms. They are less interested in buying large ticket items such as tool storage boxes and diagnostic computers that cost thousands of dollars and can take years to pay. Instead, they buy cheaper items that they can pay quickly.
“When we talked to them, we could say that they were not going to want to hide in a three or four-year payment system,” he said. “They prefer to use the resources they have to buy things where they say:” OK, I will reimburse him in 15 weeks, then after 15 weeks, I will do it again if things are always good. “”
In response, Snap-on has moved to more at low cost articles, said Pinchuk, and he adapted to uncertainty in another way, such as moving materials and stocks in place like coverage against potential rates.
“We are trying to prepare so that we are not completely taken with our pants,” he said.
Other companies do the same. Imports increased at the end of last year While companies were trying to get ahead of prices.
For economists, such decisions illustrate the costs of uncertainty: companies make decisions that would not make sense in a normal commercial environment – buy stocks before they need it, modifying the schedules of Planned production – to prepare government policies which could or not, ultimately, ultimately take effect. In this way, uncertainty is like a tax, distorting decisions and making the economy as a whole less effective.
It could be some time before the total costs of this tax become clear. Slower hiring and investment should, in theory, appear in economic data, but it could be difficult to distinguish the impact of the uncertainty of ordinary fluctuations, or from responses to other global developments.
The recent strength of the American economy can help amuse the blow. As long as sales are strong and the economy seems stable, companies are likely to continue hiring and investing, said Gregory Brown, professor of finance at the University of North Carolina.
“The uncertainty of politicians could lead you to go up part of this investment, but that will probably not interrupt you,” said Brown.
If the Americans react to uncertainty by removing expenses, this could have a greater effect. The measures of consumer feeling climbed after the elections, especially among the Republicans, but recently dropped. In surveys, consumers express their concern that prices will lead to higher prices.
Mr. Coulter, of Biscuit Belly, said that he was concerned about the impact of specific federal policies: what the repression of the immigration of the administration could mean to find egg prices. But more than that, he fears that the assault of the news and the fear of what it can mean, will maintain customers at home.
“People in times of uncertainty are in a way in a way downwards, and they hold their money because they do not know what will happen the next day,” he said. “I think there is just a lot of confusion. No one really knows what will happen next.
Jordyn Holman And Jack Ewing Contributed reports.