Uncertainty over economic policy has returned to levels reached during the 2020 pandemic and, more recently, the tariff announcements of this past spring.
In April, the uncertainty was driven primarily by the ever-changing tariffs. But now, the uncertainty is being fueled not only by tariffs, but also by restrictive immigration policies, the U.S. government shutdown as well as a range of disruptions emanating from the political sector.
These factors are weighing heavily on small and medium sized firms that are now reducing their headcounts while large firms have slowed their hiring to a crawl.
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While large technology firms continue to invest their own profits into the construction of data centers, we are growing concerned around the risk to capital investment excluding the technology sector.
With the approval of retroactive full expensing of business investments, we would have expected capital expenditures excluding the tech sector to increase. But we are not yet seeing the benefits of that change in the monthly or quarterly data.
With the shutdown, businesses have more reason to take a cautious approach. On Sept. 30, as the shutdown deadline approached, the Economic Policy Uncertainty Index jumped to 528 from 298 the previous day, and it has remained elevated.
It all has a chilling effect on business investment and spending by consumers.
Depending on its duration, the U.S. government shutdown, and the furloughs that go along with it, will add to the existing strain on the labor market, increasing the risk factored into the price of financial market assets.
Created by the economics professors Scott Baker, Nick Bloom and Steven Davis, the Economic Policy Uncertainty Index for the U.S. economy factors in newspaper coverage over government matters, changes in the tax code and the dispersion of economic estimates of professional forecasters.
