Uncertainty over future tax bills and government spending, the theory goes, chills business’ decisions to invest in new plants and equipment or hire new workers. Resolving this uncertainty would give businesses the confidence to invest and hire.
But economic data suggests that uncertainty isn’t impacting all businesses equally. While large corporations are confident about the future – and posting strong profits – key indicators of small business health, like the number of new business starts, remain depressed. As a result, it may be smaller firms that stand to benefit the most from the resolution of today’s high levels of policy certainty.
Uncertainty Is At Record Levels
Bloom and Davis created and maintain an index that quantifies economic policy uncertainty, based on the quantity of media coverage of policy-related uncertainty, the number of tax provision set to expire in future years, and disagreement among economic forecasters.
The index shows that since the financial crisis in 2008, economic policy uncertainty has averaged about twice the level of the previous 23 years. In December 2012, as lawmakers and the White House tangled over the fiscal cliff, their uncertainty index reached its third highest point ever, just behind the peak of the first debt limit crisis in August and September 2011.
Large Corporations Are Having More Success Navigating An Uncertain Business Environment
General Electric CEO Jeffrey Immelt said last month that his firm, with its dozens of business lines and lengthy multi-year product cycles, can’t afford to manage around frequent shifts in macroeconomic uncertainty. It is the small and medium sized businesses that GE works with, Immelt said, that are really seeing the burden of uncertainty.
Stock prices – perhaps the best measure of the expected future profitability of large US corporations – are up significantly, supporting Immelt’s statements. The Dow is posting record highs, surpassing its pre-crash 2007 level, and the S&P 500 is closing in on its peak too.
And businesses are making new investments. Gross private investment is up by over one-third since the end of the recession – and is growing at over 1.5 times the rate that it did in the previous recovery.
But small businesses appear to be having a more difficult time managing through the recovery. Businesses with fewer than 500 employees are hiring new workers 30% slower than businesses with more than 500 employees, according to data from payroll processor ADP. And Bureau of Labor Statistics data shows that there are about 20,000 fewer new businesses opening up shop per quarter than there were before the recession.
Several features of the recession and its aftermath, such as the tightening of credit, have disproportionately impacted small businesses – the increased level of economic uncertainty appears to be another burden that takes a heavier toll on smaller firms.
This disparity in the consequences of policy uncertainty is perhaps most easily seen in the divergence of small and large business confidence. The small business optimism index published by the National Federation of Independent Business has remained depressed – January 2013 was its fourth-lowest reading ever – while a comparable measure for large businesses published by the Institute for Supply Management surpassed pre-crash levels almost immediately after the end of the recession in June 2009.
Increased economic certainty may be coming soon
Last month, St. Louis Fed President James Bullard cited the prospect of an imminent reduction in global economic uncertainty as a bullish factor for US macroeconomic growth prospects. Global trends – stabilization or even recovery in the Eurozone, and stronger growth in emerging markets – are important pieces of Bullard’s analysis, but he also cites the potential resolution of major US policy questions now that the 2012 election cycle is over as promising factors for growth.
Much of the growth from reduced uncertainty that Bullard, the Romney campaign, and others have suggested may come as a function of small businesses reacting to the resolution of policy questions by gaining confidence and increasing hiring. That means that small businesses – like large corporations who already have the habit of making their voices heard in Washington – must press their case with lawmakers. After all, they have the most to gain.