This is an axiom that I've heard many times in business school lecture halls and invoking corporate revenue. Uncertainty is bad for business.
The US economy is trying to test its proposition like never before.
The first weeks of the second Trump administration were a dizzying whirlwind of economic policy movements. A freeze on spending was declared and subsequently retracted. Federal programs, and even the entire agency, have been suspended or closed. Customs duties are threatened, announced, cancelled, delayed or enacted for days or even hours. Measures of economic policy uncertainty have skyrocketed to levels normally associated with recessions and global crises.
Business leaders are still shaking their heads, many of whom cheer for President Trump's election victory and hope for tax cuts and regulations to be reduced.
“Your speculation is as good as what's going on in Washington,” said Nicholas Pinchuk, CEO of Snap-On, a car tool maker.
“So far, what we're seeing is a lot of costs and a lot of confusion,” Ford Motor CEO Jim Farley told investors at a meeting in New York this week. I did.
“We're looking forward to seeing you in a lot of fun and relaxing,” said Chad Coulter, founder and CEO of Biscuit Berry, a Louisville, Kentucky-based breakfast restaurant chain.
But regarding all their concerns, the three chief executives say they are pushing forward with planned investments and feel that they are good about their outlook. Many of their peers saw a surge in business confidence measurements after the election. And while there are hints that the glow has been dulled to some extent, business leaders as a group remain bright.
A measure of small business sentiment from the National Federation of Independent Businesses checked down in January, but remained higher than any other month in the Biden administration.
“You really have a battle between business optimism and greater business uncertainty. They're kind of an opposition force,” he says, “and how uncertainty affects the economy. said Nicholas Bloom, a Stanford professor who studied it.
But in general, even business leaders who are sympathetic to the new administration seem to be struggling to reach a deal on legislative priorities, especially when Washington's turmoil is not settling down relatively quickly. If it appears, it warns you that your confidence may weaken.
For many members of the National Federation of Independent Companies, a priority is to maintain small business tax credits that are expected to expire at the end of the year.
“We're in February, people are optimistic and they're giving a chance to a new governing regime,” Brabant said of the prospects for a parliamentary agreement to expand the provisions. “If you get to fall and you get to October, November, if you don't have a deal, then it's going to make people very nervous.”
Uncertainty Cost
Recent economists have sought to study the effects of uncertainty in academic rigor and have sought to develop measures to assess phenomena over time. Their research consistently found that uncertainty makes firms more reluctant to employ and invest in companies and more reluctant to cut sales beyond the policy's own impact.
“Uncertainty itself is harmful to business activities,” said Stephen J. Davis, an economist at Stanford who studied the issue. He said that businesses can usually adapt even in harmful ways when rules change. However, if it's not clear what the rules are, companies can feel themselves as limbo.
Kim Vaccarella discovers that firsthand. Her New Jersey-based company Bogg Bag produces brightly colored totes made in China and sold in Target, Bloomingdale and other stores.
New tariffs on imports from China could add $2.50 to the wholesale cost of each bag. This is a significant increase in products that are typically sold for between $55 and $100. Vaccarella recently traveled to Sri Lanka and Vietnam to explore shifting some of her production there, but making such a big decision is difficult when trade policy changes weekly. is.
“It's just one of those tricky places you know what you know. How do you move from here?” she said.
Economic policy uncertainty has risen sharply since the election, according to an index developed by Davis, Bloom and Northwestern University economist Scott Baker. The recent rise is rare. Past surges have been linked to recessions, financial crisis, or other global developments.
“The traditional uncertainty shock occurred after negative world events,” Bloom said. “In this case, it's almost like a deliberate move to uncertainty.”
This makes it difficult to predict how a company will respond. Bloom said they could bet on mitigating uncertainty and focus on President Trump's potential benefits. He noted that investors seemed almost indifferent to the torrent of news from Washington. Since Trump took office, measuring volatility in financial markets has generally been subservient.
But executives are likely to be cautious about making long-term investments, Bloom said. He said it is difficult to reverse, especially so that it takes a long time to be rewarded, like investments in research and development, such as moving factories.
Pull back
Snap-on's Pinchuk said he has already seen signs of attention among customers, including both auto repair shops and individual mechanisms. They aren't very interested in purchasing big ticket items such as tool storage boxes and diagnostic computers that cost thousands of dollars and can take years to pay off. Instead, they are buying cheaper items that could quickly be rewarded.
“When we spoke to them, they could say they didn't want to get caught up in a three- or four-year payment scheme,” he said. “They said, 'Okay, I'll pay it off in 15 weeks. In 15 weeks, if things are still good, I'll do it again.”
In response, Snap-on has moved to creating lower cost items, Pinchuk said, and it has made materials and stocks into place as a hedge against potential tariffs. Other ways to adapt to uncertainty, such as being in place.
“We try to prepare ourselves and make sure we don't get our pants completely wrapped around,” he said.
Other companies do the same. Imports spiked at the end of last year as companies tried to preempt tariffs.
For economists, such decisions indicate the cost of uncertainty. Companies are making decisions that make no sense in the normal business environment – buy stock before they need it, change long-term planned production schedules, and ultimately end up is preparing to prepare for government policies. Please enable it. In this way, uncertainty is like a tax, distorting decision-making and making the economy as a whole more efficient.
It may take some time before the full cost of that tax is revealed. In theory, employment and investment should be slow, but should appear in economic data, but it is difficult to distinguish the effects of uncertainty from normal fluctuations and responses to other global developments.
The recent strengths of the US economy may help ease the blow. Gregory Brown, a finance professor at the University of North Carolina, said businesses are likely to continue to hire and invest as long as sales are strong and the economy appears to be stable.
“Policy uncertainty could lead to dial-back some of that investment, but I'm probably not going to lead you to a deadly halt,” Brown said.
However, if Americans respond to uncertainty by pulling back their spending, it could have a greater effect. The measurement of consumer sentiment, particularly among Republicans, has skyrocketed after the election, but has recently immersed. The survey shows consumers express concern that tariffs will lead to higher prices.
Biscuit Belly's Coulter said he was worried about the impact of certain federal policies. What does the regime's immigrant crackdown mean to find workers, what does construction cost mean, what does it mean that they couldn't control the avian flu epidemic mean? Egg prices. But more than that, he is worried that the onslaught of news and the fear of what it means will keep customers at home.
“People in times of uncertainty are just getting intense and they're holding on to the money because they don't know what's going to happen the next day,” he said. “I think there's a lot of confusion. No one really knows what's going to happen next.”
Jordyn Holman and Jack Ewing contributed the report.
