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

Policy volatility accentuates downturns, stalls recoveries and puts "chokehold" on growth.

By ·

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!

Article Topics

Economy · Global · MAPI · · All Topics
Latest Whitepaper
Gaining Efficiencies Through End-to-end Warehouse Automation
Warehouse and distribution center managers in B2B and B2C have never been under more pressure to scale up their operations to meet customer demands in the new, digital economy. Warehouse Automation Custom digital issue, Peerless custom Automation white paper. Warehouse Automation research papers.
Download Today!
From the September 2016 Issue
The fashion retailer has used warehouse execution software and automation to create a true omni-channel distribution center.
Lift Truck Tips: Knowledge is Power
Software system gives new facility a competitive edge
View More From this Issue
Subscribe to Our Email Newsletter
Sign up today to receive our FREE, weekly email newsletter!
Latest Webcast
5 Emerging Technologies Enabling Competitive Advantage for Distribution
Come hear about the latest in each-picking robotics, co-bots, artificial intelligence, autonomous vehicles, sensors, drones and droids that are enabling competitive advantage for distribution.
Register Today!
EDITORS' PICKS
American Eagle Outfitters’ omni-channel journey
The fashion retailer has used warehouse execution software and automation to create a true...
The data-driven lift truck
Now that manufacturers and distributors are using the data from their automated systems to drive...

Destination Maternity: Destination Automation
Running short of space in its old facility, Destination Maternity Corp. built a new, highly...
Hibbett Sports: Faster, Flexible and Efficient
A high-speed conveyor and sortation system at Hibbett Sports’ Alabama distribution center speeds...