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Uncertainty itself

Rochester Business Journal
January 3, 2014

The Great Recession ended 4 1/2 years ago, but ever since the cloud of "uncertainty" has hung over the economy. More so than its causes, uncertainty itself has weighed on the recovery.
In the early days of the current expansion, worry about what might lie ahead was wholly justified. As the expansion continued, however, concern about purely economic factors gave way to "policy uncertainty"-the muddied outlook caused by endless partisan wrangling over the federal deficit and long-term debt.
According to research by a trio of Stanford University economists, U.S. economic policy uncertainty over the last few years has been roughly 50 percent higher than the average over the last quarter-century. Since 2011, the Vanguard Group estimates, the impact has been a $261 billion drag on the economy, holding GDP growth to 2 percent when it could have been 3 percent.
It would be silly to say the antics in Washington over the last few years--from the debt-ceiling showdown in August 2011 to the fiscal-cliff crisis in December 2012 to the 16-day government shutdown this fall--have been good for the economy. Yet blaming policy uncertainty seems almost too convenient.
The fact is that positive news about the economy is not and has not been difficult to find. Third-quarter growth was at an annual rate of 4.1 percent, the best since 2011. U.S. unemployment in November was 7 percent versus 7.8 percent a year earlier and a peak of around 10 percent in the wake of the recession. In Rochester, the jobless rate was 6.3 percent compared with 7.4 percent a year ago, and 5,400 more people had jobs.
Meanwhile, the stock market is up more than 150 percent since its lows in March 2009, the housing recovery has clear momentum and corporate profits by some measures are at an all-time high. Also at historically high levels are corporate cash holdings of U.S. companies.
Why are firms holding on to so much cash, instead of reinvesting it? Ah, right: uncertainty.
With a federal budget agreement finally in place and the deficit as a share of GDP below 3.5 percent, compared with nearly 10 percent in 2009, perhaps it's time to give uncertainty a rest. Optimism, demonstrated by hiring and investing, might be a much more productive strategy.

1/3/14 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email

What You're Saying 

michael thornton at 9:41:18 AM on 1/3/2014
Simple stats without underlying meaning is not a recipe for economic optimism. Take GDP. While it was a positive, the change in private inventories gave a +1.67 percentage point contribution to Q3, which could mean that the consumer is not buying what is being built. Invento...  Read More >

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