Why does the so-called economic recovery stink so bad? Is is just poor demand and deleveraging or are job creators so worried about the future course of economic policy that they are not hiring or investing? The Federal Reserve Bank of Cleveland took a look and here is what they found (via Sean Hackbarth at ChamberPost):

We find statistically significant negative effects of policy uncertainty on small business owners’ plans to hire and make capital expenditures over the 1986 to 2011 period. We also find a large effect of the economic downturn on small business plans, but the two effects do appear to be independent. The negative effects of policy uncertainty show up even when we weight the components of policy uncertainty in several different ways. The results also stand up when consumer confidence is controlled for, suggesting that the effects are distinct from consumer sentiment. …

While the downturn and weak recovery certainly had a large negative effect on small business hiring plans, policy uncertainty has exacerbated this effect. In the summer of 2011, the net percentage of small business owners planning to hire would be 6 percentage points higher if it were not for policy uncertainty. That is, either 6 percent more small business owners would be planning to hire (or 6 percent more small business owners would not be planning to lay off workers), were policy uncertainty not currently an issue. The results for capital expenditures are very similar. …

While this statistical analysis is informative about the relationship between policy uncertainty and small business expansion plans, we cannot say that “policy uncertainty” causes small business hiring and capital expenditure plans to decline. That is because a purely statistical model cannot identify fundamental causes. But whatever the fundamental cause, our analysis indicates that adding information about policy uncertainty improves our ability to explain the survey responses provided by the NFIB’s survey respondents.

In that sense, we can say that the correlations between the two are strong enough to reject the argument that policy uncertainty is irrelevant for currently weak small business expansion plans. In our view, policymakers should take seriously the widespread anecdotal reports that policy uncertainty is adversely affecting small business owners’ expansion plans.

None of this is surprising to folks who actually talk to business owners, but it is nice to have the propeller heads back it up.