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Political Uncertainty Undermines Business Confidence

Posted by Andre Mayer on Dec 3, 2013 9:08:00 AM

Political uncertainty continues to whipsaw the economic recovery.

Massachusetts Business ConfidenceMassachusetts employers increasingly confident about the prospects of their own companies remain skittish about the future in the face of serial government shutdowns, default scares and a seemingly intractable partisan fiscal standoff.

The freshest evidence comes this morning from the November Associated Industries of Massachusetts Business Confidence Index, which rose 3.5 points in November to 50.2, extending the up-and-down pattern that has prevailed for some time.  The Index is up 3.4 from last November, when it was driven down by concerns about the fiscal cliff, and up 3.5 from October, when the federal government shut down.

"When left alone, the economy is making progress – but with recurrent uncertainties on the political side, it isn't able to build much momentum," said Raymond G. Torto, Chairman at CB Richard Ellis Group, Inc., the chair of AIM’s Board of Economic Advisors (BEA).

"Coming back from the psychological and economic impact of the federal shutdown, employers still see an upside," said Michael A. Tyler, Chief Investment Officer, Eastern Bank Wealth Management, a BEA member. "They do not expect politics to bring growth to a halt. Also, whether or not current Federal Reserve policy is actually good for the economy today, employers do perceive it as a net positive."

The U.S. Index of business conditions prevailing nationally gained five points in November to 42.8, while the Massachusetts Index of conditions within the Commonwealth rose 2.5 to 47.0.

"These indicators must be read as containing a large component of political commentary," Tyler noted.  "The political goings-on in Washington undermine the confidence of many businesspeople; not one survey respondent rated national conditions 'very good'.  Some state issues may also be lessening confidence at that level. At the same time other indicators, notably those related to respondents' own operations, paint a sunnier picture of the business climate."  

AIM’s Business Confidence Index has been issued monthly since July 1991 under the oversight of the Board of Economic Advisors. Presented on a scale on which 50 is neutral, its historical high was 68.5, attained in 1997 and 1998; its all-time low was 33.3 in February 2009. 

Confidence readings have moved in a see-saw pattern since April, alternating modest increases and decreases never far from the neutral 50 level. The gyrations have taken place against the backdrop of a surge in unemployment in Massachusetts from 6.4 to 7.2 percent.

All of the sub-indices based on selected questions or respondent characteristics rose in November along with the main Index, and all were up from November 2012 (a weak month).  The Current Index, tracking employers’ assessment of existing business conditions, added 3.1 points to 49.3, and the Future Index, measuring expectations for the next six months, gained 3.0 to 50.8.

The Company Index, which measures survey respondents’ overall confidence in the situations of their own operations, added 3.8 points in November to 55.5. The Employment Index rose 2.6 to 51.1, and theSales Index gained 2.2 to 55.2.

"The numbers have bounced back to about where they were in September, which is good news," said BEA member Sara L. Johnson, Senior Research Director of Global Economics at IHS Global Insight, "but job creation, which has been a stumbling block for economic progress, remains a concern.”

Analysts say uncertainty has seeped into state issues as well.

"The up-and-down pattern of the Business Confidence Index is part of what has been an up-and-down year for Massachusetts employers and for the state's economy," said Richard C. Lord, AIM’s President and CEO, a BEA member.

"Despite headwinds from federal tax increases and sequestration, economic growth started strong, but then weakened in the second quarter, picked up again in the third, and was probably impaired in this quarter by the shutdown. We've had some ups and downs on Beacon Hill as well, for example over the short-lived tax on software services."

Topics: AIM Business Confidence Index, Economy, Unemployment

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