Subscribe to our free, weekly email newsletter!


MAPI Analysis: Public policy uncertainty plays role in restraining business investment

Policy volatility accentuates downturns, stalls recoveries and puts "chokehold" on growth.
By Modern Materials Handling Staff
May 16, 2014

Public policy uncertainty can cause economic distress, make businesses pull back on investment, and have adverse effects on job creation, according to a new report from the Manufacturers Alliance for Productivity and Innovation (MAPI).

In “Uncertainty’s Chokehold on Growth,” Daniel J. Meckstroth, Ph.D., MAPI vice president and chief economist, argues that public policy uncertainty tends to be pro-cyclical and accentuates downturns, impedes recoveries, and reinforces the boom times—just the opposite of what fiscal policy should do to dampen the business cycle.

“Minimizing policy changes in times of economic duress would reduce uncertainty and greatly improve the pace of recovery and expansion by removing a restraint to business investment and private sector employment growth,” he wrote. “Product market growth, projected cash flow, and expected profits are naturally the most important drivers of business investment but uncertainty creates an option value on the financial returns for waiting in order to gather more information. A firm or person may amass cash rather than finance an investment if uncertainty makes the investment’s rate of return difficult to calculate.”

The report highlights the severe decline in inflation-adjusted business investment and the recovery’s slow pace in the 2008-2009 recession cycle and uses private nonresidential investment—equipment, structures, and intellectual property—as an example. This sub-sector declined 20% from peak to trough, while in the previous seven economic cycles it showed an average 5% reduction. For the previous two severe recessions—1974-75 and 1980-82—private nonresidential investment fell by an average of 10%.

Likewise, the recovery in business investment is substantially less robust and more prolonged. A full recovery in business investment spending did not occur until the third quarter of 2013. If the current cycle mirrored the previous two severe recessions, nonresidential investment would have recovered by the second quarter of 2011.

“The slow pace of investment is difficult to explain without using the level of policy uncertainty as at least a partial explanation,” Meckstroth wrote. “Businesses are as profitable as they ever have been. Corporate profit margins, measured by the ratio of after-tax profits to output, are at double the average level since World War II. Corporate balance sheets are loaded with cash and debt ratios are low. Considering these positive factors, it’s very likely that uncertainty has significantly held back growth.”

null

Subscribe to Modern Materials Handling magazine

Subscribe today. It's FREE!
Find out what the world’s most innovative companies are doing to improve productivity in their plants and distribution centers.
Start your FREE subscription today!

Recent Entries

You’ve heard the old saying, it was the best of times, it was the worst of times. Rob Handfield sees this as the best of times for procurement professionals, who have an opportunity to deliver real value to their organizations.

While core metrics were down from a very impressive July, the August edition of the Non-Manufacturing Report on Business from the Institute of Supply Management (ISM) was still very strong.

Company's multi-tenant SaaS solution enables quick onboarding of new trading partners and omni-channel capabilities.

The Institute for Supply Management’s (ISM) August edition of the Manufacturing Report on Business saw its PMI, the ISM’s index to measure growth, fall 1.6 percent to 51.1, following a 0.8 percent decline to 52.7 in July. Even with the relatively slow growth over the last two months, the PI has been at 50 or higher for 31 consecutive months.

Global demand remains stable as packaging equipment providers of all sizes shift focus.

Article Topics

News · Global · Economy · MAPI · All topics

About the Author

Josh Bond, Senior Editor
Josh Bond is Senior Editor for Modern, and was formerly Modern’s lift truck columnist and associate editor. He has a degree in Journalism from Keene State College and has studied business management at Franklin Pierce University.


© Copyright 2015 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA