It is an axiom that is heard countless times in the business school reading rooms and on company calls: uncertainty is bad for business.
The American economy is at the point of testing proposition like never before.
The first weeks of the second Trump administration were a dizzying whirlwind of economic policy movements: a freezing of the expenditure was explained and then withdrawn. Federal programs, and even entire agencies, have been suspended or closed. Rates are threatened, announced, canceled, delayed or established – sometimes within a few days or even hours. Economic policy measures have risen to levels that are normally associated with recessions and global crises.
Managers – many of whom have encouraged the election victory of President Trump, in the expectation of lower taxes and reduced regulations – have shaken their heads.
“Your gamble is as good as mine what happens in Washington,” said Nicholas Pinchuk, Chief Executive of the Automotive Toolmaker Snap-On.
“So far we see a lot of costs and a lot of chaos,” Jim Farley, the Chief Executive of Ford Motor, told investors this week at a conference in New York.
“It is as if your head is running with what comes down – you just never know,” said Chad Coulter, founder and chief executive of Biscuit Belly, a chain of breakfast restaurants located in Louisville, Ky.
But for all their worries, the three chief executives say that they continue with planned investments and that they feel good about their prospects. This also applies to many of their colleagues: measures of business trust have risen after the elections, and although there are hints that has dulled shine to a certain extent, business leaders as a group remain cheerful.
A measure of the sentiment of small businesses of the National Federation of Independent Business in January, but remained higher than in the BIDEN administration every month.
“You really have a fight between greater business optimism and greater business uncertainty, and they are a kind of opposite forces,” said Nicholas Bloom, a professor at Stanford University who has studied how uncertainty influences the economy.
But even business leaders generally sympathetic to the new government warn that trust could fade if the unrest in Washington does not calm down relatively quickly – especially if Republicans have difficulty achieving deals about their legislative priorities.
For many members of the National Federation of Independent Business, the priority retains tax benefits about small companies that end at the end of the year, said Jeff Brabant, head of the relationships of the federal government.
“We are in February and people are optimistic and they give the new government regime a chance,” Mr Brabant said about the prospects of a conference agreement to extend the provision. “If we get to the fall and we in October, November, and there has been no deal, that is when, I think, people would get very nervous.”
The costs of uncertainty
In recent years, economists have tried to study the effect of uncertainty with academic strictness, where measures are being developed to assess the phenomenon over time and between countries. Their research has consistently found that uncertainty makes companies reluctant to hire and invest, and leads to lower sales – outside the policy impact.
“Uncertainty itself is harmful to business activities,” said Steven J. Davis, a Stanford economist who studied the issue. When rules change, even in harmful ways, companies can usually adjust, he said. But if it is not clear what the rules will be, companies can be in the dark.
Kim Vaccarella discovers that firsthand. Her bogg BAG established in New Jersey makes brightly colored containers that are made in China and are sold at Target, Bloomingdale's and other stores.
New rates for input from China can add $ 2.50 to the wholesale costs of each bag, a significant increase for a product that usually sells for $ 55 to $ 100. Mrs Vaccarella recently traveled to Sri Lanka and Vietnam to explore the exploring of part of her production there – but it is difficult to make such a big decision when trade policy changes every week.
“It's just one of those tricky places to be in, with, you know: how do we continue from here?” she said.
The uncertainty of economic policy has risen sharply since the elections, according to an index developed by Mr Davis, Mr. Bloom and Scott Baker, an economist at Northwestern University. The recent increase is unusual: previous spikes are associated with recessions, financial crises or other global developments.
“Traditional uncertainty shocks took place after negative world events,” said Mr. Bloom. “In this case it is almost like a deliberate step to disturb uncertainty.”
That makes it difficult to predict how companies will respond. It is possible, Mr Bloom said, that they will bet on a relaxation of uncertainty and will concentrate on the potential benefits of a Trump presidency. He noted that investors usually do not come up with worries because of the stream of news from Washington: measures of financial market volatility have generally been docile since Mr Trump took office.
But managers are likely to be careful with making long-term investments, said Mr Bloom, especially those who are difficult to reverse, such as moving a factory, or who take a long time to bear fruit, such as investigations in research And development.
Retreat
Mr Pinchuk, from Snap-On, said that he already saw signs of caution among customers, including both car repair workshops and individual mechanics. They are less interested in buying items with big ticket such as tool storage boxes and diagnostic computers that cost thousands of dollars and can take years to bear fruit. Instead, they buy less expensive items that they can pay off quickly.
“When we talked to them, we could see that they would not want to get involved in a payment arrangement of three or four years,” he said. “They prefer to use all the sources they have to buy things where they say:” Ok, I will pay it within 15 weeks, and after 15 weeks I will do it again if things are still good. “
In response, Snap-On has shifted to making more cheaper items, Mr Pinchuk said, and it has adapted to uncertainty in other ways, such as moving materials and inventory in place as a cover against potential rates.
“We try to prepare ourselves so that we are not completely caught with our pants,” he said.
Other companies do the same. Input increased at the end of last year as companies tried to lead the rates.
For economists, such decisions illustrate the costs of uncertainty: companies make decisions that would not be logical in a normal business environmental inventory before they need it, changing long-planned production schedule come into effect. In this way, uncertainty as a tax, the distortion of decisions and making the economy as a whole is less efficient.
It can take a while before the full costs of that tax become clear. Hiring and investing slower must appear in theory in economic data, but it can be difficult to distinguish the impact of uncertainty from ordinary fluctuations, or from answers to other global developments.
The recent power of the American economy can help kiss the blow. As long as the sale is strong and the economy seems stable, companies will probably continue to hire and invest, said Gregory Brown, professor financially at the University of North Carolina.
“Policy uncertainty can cause you to reduce part of that investment, but it will probably not stop you,” said Mr. Brown.
However, if Americans respond to uncertainty by withdrawing over expenses, it can have a greater effect. Measures of consumer sentiment rose after the elections, especially among Republicans, but were recently immersed. In surveys, consumers express their concern that rates will lead to higher prices.
Mr. Coulter, Van Biscuit Belly, said he was concerned about the impact of specific federal policy: what the immigration of the administration could mean for finding employees, which rates can mean for the construction costs, for which a failure to the Bird flu epidemic to control egg prices. But more than that, he is worried that the attack of news and fear of what it could mean, will keep customers at home.
“People in times of uncertainty are just a bit down, and they hold their money because they don't know what will happen the next day,” he said. “I think there is just a lot of confusion. Nobody really knows what will happen. “
Jordyn Holman And Jack Ewing contributed reporting.
