Is the US economy suffering from too much uncertainty or too little demand? Maybe both

Economic Policy Uncertainty Index

Economic Policy Uncertainty Index

A popular explanation, at least on the right, for the slow US economic recovery blames policy “uncertainty.” Business investment is weak because CEOs are worried about, for instance, the many facets of Obamanomics — particularly Obamacare’s taxes, spending, and regulations — but also the huge rise in the national debt. Maybe a debt crisis is coming soon (although little sign of that can be seen in the dollar or US treasury rates).

Economic uncertainty during the Great Recession and its immediate aftermath chilled business and consumers. Fear of total economic collapse was running high. And business didn’t much like the 2011 debt ceiling battle. Here are the authors of the Economic Policy Uncertainty Index, Scott Baker and Nicholas Bloom, in 2012:

Our index shows sharp spikes in economic policy uncertainty around major elections, wars and the 9/11 terrorist attacks. More recently, it spiked sharply after the Lehman bankruptcy in September 2008 and the passage of the Troubled Asset Relief Program (TARP) legislation shortly afterwards. It remained high until late 2011, driven by continuing policy uncertainty around the 2010 mid-term elections, the debt ceiling dispute and the crisis of the Eurozone. Only over the last couple of months has policy uncertainty finally started to drop back down to more normal levels.

Indeed, uncertainty — at least of the sort tracked by Baker and Bloom — has continued to decline. Yet, as a JPMorgan note recently pointed out, business spending has moderated, too. JPM: “In short, spending trends through this expansion seem at odds with the uncertainty-driven story of capital spending.”

A new CEO survey also suggests that dramatic drop in uncertainty leading won’t spur dramatically more investment. From the WSJ: “U.S. business leaders, encouraged by the recent break in Washington’s budget gridlock, are increasingly looking to boost spending. But that probably won’t come in ways that would drive rapid hiring or economic growth, according to a new Business Roundtable survey of top CEOs.”

On the other hand, business would invest more if executives thought economic growth would accelerate, pointing to tax reform as a way of making that happen.

But what about small business? This analysis is from the February NFIB Small Business Economic Trends report:

Uncertainty is a major cause of the reluctance to spend and hire. Large  firms are loaded with cash but unwilling to spend. For small firms, record  low numbers are reporting the current period as a good time to expand, for  5 years and running. More firms are reducing inventory than adding to it, even in a growing economy. And more firms are expecting a deterioration in the economy than an improvement. In NFIB’s Problems and Priorities
survey, uncertainty about the economy and government policy both rank in  the top 5 most severe problems facing small business owners. You don’t  bet your money on a future you cannot see clearly.

According to the NFIB, small biz optimism remains at historically low levels. But why? When you look at the survey results, a number of issues pop up:


Now when I look at the NFIB historical charts (below), the two problems that strike as being unusually acute on a historical bases are sales and regulation. One demand-side issue, one supply-side issue:





Taken all together, the above info suggests continued need for continued monetary action, as well as regulatory and tax reform. So a little something for everybody.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

5 thoughts on “Is the US economy suffering from too much uncertainty or too little demand? Maybe both

  1. Since 1950 government’s take of GDP (spending + regulation compliance) has grown from 30% to 60%. Those who whine about “greed” and the 1% are blind to the real swine in our economy.

      • Govt spending (fed, state, local) is 39% of GDP. ( Federal regulation costs have been estimated to be about $1.8 trillion by CEI ( There have been about 8 similar studies in the past 15 years and their results, accounting for recent growth, are consistent.

        Recent regulation news puts the fed regulation growth rate under Obama at 11%. I estimate the cost of state+local regs at 10% of GDP annually.

        The total is about 60%. Nobody has noticed, apparently. We are Europe. Stagnant, in danger of national bankruptcy.

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