Uncertainty and Economic Growth

Are economic and policy uncertainty discouraging businesses — and small businesses in particular — from hiring?  Is such uncertainty a factor discouraging economic recovery?  A new analysis by Mark Schweitzer of the Federal Reserve Bank of Cleveland and Scott Shane of CWRU’s Weatherhead School of Management suggests some pundits and policymakers have been too quick to dismiss this possibility. Here’s how their analysis concludes:

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 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.