Businesses don't like uncertainty, but between recessions and government budget standoffs, they've had to get used to it in recent years. A new study from UConn looks at just how much the economy has been affected by sustained crisis management.
When economist Steven Lanza did a Google search of the term "uncertainty" to find recent media stories about fiscal showdowns in Washington, he found a very interesting relationship. Uncertainty has a geography. "States that lie the closest to Washington, D.C. are most concerned about the shenanigans going on down there," he said.
It turns out that for those states like Connecticut, which keep a close eye on the capital, this level of concern about government incompetence has a real economic penalty attached. Using an index that measures uncertainty through those media stories, imminent tax changes and local disagreement among economists, Lanza mapped the phenomenon. When uncertainty peaks, economic indicators like job growth, employment and industrial production head immediately in the opposite direction, and the effect is lasting. "In fact, the effects reach a maximum in Connecticut about a year forward," Lanza said. "So we were still feeling the effects of that last wave of uncertainty for a year before the effects start to lessen and to dissipate, and we return to where we started out."
When Lanza compared how the recovery would have progressed in a fiscally stable climate with what actually happened, he found a gap in Connecticut of 20,000 jobs. He said, "That's about the rate at which we anticipate the economy adding jobs over the course of the next four quarters. So you might say that we lost a year of recovery because of the uncertainty that's been artificially injected into the system by the failure of Washington to be able to simply pay its bills."
All this may still be playing out. While Connecticut showed positive job gains over the third quarter of 2013, adding more than 5,000 jobs, Lanza said the month-by-month numbers may be telling a story about the government shutdown. "What is interesting about the third quarter," he said, "is that all of the job gains occurred in July. You look at August and September, and the job numbers were down; they were negative, and in October they were flat. Again, that could be noise, or it could be that we were feeling some of the effects here in Connecticut of what was going on in Washington, D.C."
Economists are forecasting growth for the U.S. of roughly 2.8 percent next year. If that figure is accurate, we could add back the 20,000 jobs that we appear to have lost to uncertainty.