Uncertainty is generally bad for business. Companies function best when conditions are relatively predictable and they can plan accordingly. If firms are anxious about the future, then economic growth will be adversely affected.
Obviously, the world is a complex place, and we always have to deal with an unknown future. This is neither new nor unusual. Currently, however, there is an extra measure of uncertainty in the form of the actions and statements of the Trump Administration. While much of the basic agenda has a positive, pro-business thrust, it is undermined by frequent shifts in position and the seeming lack of a consistent and underlying agenda. We have recently seen compelling evidence of this fact from an impeccable source. Literally hundreds of companies have mentioned the unpredictability of President Trump’s policies as a “risk factor” to their potential performance in their first-quarter filings with the Securities Exchange Commission (SEC). The SEC requires that public companies inform current and potential investors about things they see that could negatively affect their operations, and President Trump is getting mentioned far more often than his predecessor. Several policy areas are noted with particular frequency.
Potential trade policies have some companies concerned. For example, a more protectionist stance can cause problems for any business engaged either directly or indirectly in importing or exporting. If the U.S. implements tariffs or border adjustment fees, the cost of imports will rise. Not only do such increases impact consumers, but also firms importing inputs to other production processes. In addition, likely retaliation by other nations could increase the cost of US goods in world markets, negatively affecting exports.
Another policy which could have negative fallout is immigration reform. Many industries rely on a steady flow of immigrants to meet workforce needs. The needed laborers range from relatively low skilled (such as in construction or agriculture) to highly educated or trained (such as in technology and health care). I have studied immigration and the importance of the immigrant workforce for many years, and I can say with absolute certainty that we need such workers. Policies that overly restrict immigration will cause issues for many firms, and they are concerned.
Other policies affected companies are paying close attention to include those related to health care, the environment, regulatory changes, and tax reform. The biggest issue, however, is not the specifics of policies, but rather the lack of predictability. The direction changes in unpredictable ways and the details, which are often critical to corporate performance, seem to take a back seat to “winning.”
Several things happen when companies face uncertainty. For one, corporate strategy is developed based on expectations, and the less predictable the future, the more difficult it is to make decisions. A reasonable strategy is to hold off on investing, hiring, and otherwise expanding until the future becomes clearer. (To put it another way often used in discussions of corporate finance, higher risk means higher discount rates.) Uncertainty therefore leads to less investment. Innovation and research and development (R&D) may be curtailed. There could be less hiring and decreased output, as well as lost future economic potential. The simple truth is that most companies and investors prefer bad to unpredictable.
There’s an unfortunate paradox in all of this. One rationale for the policy agenda that many people embrace is that even with spending for infrastructure, cutting taxes, and decreasing regulation, there will be so much economic growth that the increased activity (and, therefore, tax receipts) will keep deficits from exploding. (This argument has a number of fatal flaws, including extremely optimistic growth projections, but that is a story for another day.) Thus, as the actions and often contradictory pronouncements of the Administration breed greater uncertainty, they simultaneously inhibit growth and undermine the basis for the entire agenda.
Without a doubt, there are some policies under consideration which could be beneficial for business and should move forward. Lower corporate taxes could stimulate expansion. Infrastructure investments could create near-term employment opportunities while improving long-term efficiency and productivity. Streamlining regulation could be helpful to many industries without compromising other priorities. These and other business-friendly actions could lead to many good things for the economy, but will be difficult or impossible to achieve if uncertainty remains high.
While any change in political leadership leads to questions regarding policy directions, the Trump Administration has introduced several potential shifts which increase uncertainty as well as an extraordinary lack of focus and consistency that has already made its way to hundreds of SEC filings. The economy needs a stable and sustainable Presidential presence to perform at its best, irrespective of the specific policy platform. In short, whatever your politics, the shift from “No Drama Obama” to “Total Trauma Trump” has some problematic consequences for effective policy and efficient growth.