It is an axiom heard countless times in business school lecture halls and on corporate earnings calls: Uncertainty is bad for business.
The U.S. economy is about to test that proposition like never before.
The first weeks of the second Trump administration have been a dizzying whirlwind of economic policy moves: A spending freeze was declared, then rescinded. Federal programs, and even entire agencies, have been suspended or shut down. Tariffs have been threatened, announced, canceled, delayed or enacted — sometimes in a matter of days or even hours. Measures of economic policy uncertainty have soared to levels normally associated with recessions and global crises.
Business leaders — many of whom cheered President Trump’s election victory, expecting lower taxes and reduced regulation — have been left shaking their heads.
“Your guess is as good as mine what’s happening in Washington,” said Nicholas Pinchuk, chief executive of the automotive toolmaker Snap-on.
“So far what we’re seeing is a lot of costs and a lot of chaos,” Jim Farley, the chief executive of Ford Motor, told investors at a conference in New York this week.
“It’s like your head is spinning with what’s coming down — you just never know,” said Chad Coulter, founder and chief executive of Biscuit Belly, a chain of breakfast restaurants based in Louisville, Ky.
Yet for all their concerns, the three chief executives say that they are pushing ahead with planned investments and that they feel good about their prospects. So do many of their peers: Measures of business confidence soared after the election, and while there are hints that gleam has dulled to some degree, business leaders, as a group, remain upbeat.
A gauge of small-business sentiment from the National Federation of Independent Business ticked down in January but remained higher than in any month in the Biden administration.
“You’ve really got a battle between greater business optimism and greater business uncertainty, and they’re kind of opposing forces,” said Nicholas Bloom, a Stanford University professor who has studied how uncertainty affects the economy.
But even business leaders generally sympathetic to the new administration warn that confidence could fade if the turmoil in Washington doesn’t calm down relatively quickly — especially if Republicans seem to be struggling to reach deals on their legislative priorities.
For many members of the National Federation of Independent Business, the priority is preserving a small-business tax break that is set to expire at the end of the year, said Jeff Brabant, the organization’s head of federal government relations.
“We’re in February and people are optimistic and they’re giving the new governing regime a chance,” Mr. Brabant said of the prospects of a congressional agreement to extend the provision. “If we get to the fall and we get to October, November, and there hasn’t been a deal, that’s when, I think, people would start to get very nervous.”
The Costs of Uncertainty
Economists in recent years have tried to study the effect of uncertainty with academic rigor, developing measures to assess the phenomenon over time and across countries. Their research has consistently found that uncertainty makes businesses more reluctant to hire and invest, and leads to lower sales — beyond the policies’ own impact.
“Uncertainty itself is harmful to business activity,” said Steven J. Davis, a Stanford economist who has studied the issue. When rules change, even in harmful ways, businesses can typically adapt, he said. But when it isn’t clear what the rules will be, businesses can find themselves in limbo.
Kim Vaccarella is discovering that firsthand. Her New Jersey-based company, Bogg Bag, makes brightly colored totes, which are manufactured in China and sold at Target, Bloomingdale’s and other stores.
New tariffs on imports from China could add $2.50 to the wholesale cost of each bag, a significant increase for a product that typically retails for $55 to $100. Ms. Vaccarella recently traveled to Sri Lanka and Vietnam to explore shifting some of her production there — but it is hard to make such a big decision when trade policies are changing weekly.
“It’s just one of those tricky places to be in, with, you know: How do we move on from here?” she said.
Economic policy uncertainty has risen sharply since the election, according to an index developed by Mr. Davis, Mr. Bloom and Scott Baker, an economist at Northwestern University. The recent rise has been unusual: Past spikes have been associated with recessions, financial crises or other global developments.
“Traditional uncertainty shocks happened after negative world events,” Mr. Bloom said. “In this case, it’s almost like a deliberate move to surge uncertainty.”
That makes it hard to predict how businesses will respond. It is possible, Mr. Bloom said, that they will bet on an easing of uncertainty and will focus on the potential benefits of a Trump presidency. He noted that investors appeared mostly unconcerned by the torrent of news out of Washington: Measures of financial market volatility have generally been docile since Mr. Trump took office.
But executives are likely to be cautious about making long-term investments, Mr. Bloom said — particularly those that are hard to reverse, like moving a factory, or that take a long time to pay off, like investments in research and development.
Pulling Back
Mr. Pinchuk, of Snap-on, said he already saw signs of caution among customers, which include both auto repair shops and individual mechanics. They are less interested in buying big-ticket items like tool storage boxes and diagnostic computers that cost thousands of dollars and can take years to pay off. Instead, they are buying less expensive items that they can pay off quickly.
“When we talked to them, we could tell that they weren’t going to want to embroil themselves in a three- or four-year payment scheme,” he said. “They prefer to use whatever resources they have to buy stuff where they say, ‘OK, I’ll pay it off in 15 weeks, and then after 15 weeks, I’ll do it again if things are still good.’”
In response, Snap-on has shifted to making more lower-cost items, Mr. Pinchuk said, and it has adapted to uncertainty in other ways, like moving materials and inventory into place as a hedge against potential tariffs.
“We try to prepare ourselves so that we’re not completely caught with our pants down,” he said.
Other companies are doing the same. Imports surged at the end of last year as companies sought to get ahead of tariffs.
To economists, such decisions illustrate uncertainty’s costs: Companies are making decisions that wouldn’t make sense in a normal business environment — buying inventory before they need it, changing long-planned production schedules — to prepare for government policies that might or might not ultimately take effect. In that way, uncertainty is like a tax, distorting decisions and making the economy as a whole less efficient.
It could be a while before the full costs of that tax become clear. Slower hiring and investing should, in theory, show up in economic data, but it could be hard to distinguish the impact of uncertainty from ordinary fluctuations, or from responses to other global developments.
The U.S. economy’s recent strength may help cushion the blow. As long as sales are strong and the economy seems stable, businesses are likely to keep hiring and investing, said Gregory Brown, a finance professor at the University of North Carolina.
“Policy uncertainty might lead you to dial back some of that investment, but it’s probably not going to bring you to a dead halt,” Mr. Brown said.
If Americans respond to uncertainty by pulling back on spending, however, that could have a bigger effect. Measures of consumer sentiment soared after the election, particularly among Republicans, but have recently dipped. In surveys, consumers express concern that tariffs will lead to higher prices.
Mr. Coulter, of Biscuit Belly, said he worried about the impact of specific federal policies: what the administration’s immigration crackdown could mean for finding workers, what tariffs could mean for construction costs, what a failure to control the bird flu epidemic could mean for egg prices. But more than that, he worries that the onslaught of news, and fear of what it all could mean, will keep customers at home.
“People in times of uncertainty just kind of hunker down, and they hold on to their money because they don’t know what’s going to happen the next day,” he said. “I think there’s just a lot of confusion. No one really knows what’s going to happen next.”
Jordyn Holman and Jack Ewing contributed reporting.