For much of my career of studying and forecasting activity in the U.S. economy and the commercial real estate industry, I have held fast to a maxim that what happens in the economy does so in spite of what goes on in Washington, D.C.
There is no denying that Federal Reserve policy, taxes and spending, and regulation all have an impact on the economy in various ways. But I have always held that the main driver of the economy is the ability and drive of individuals and businesses in the private sector to take an idea or a concept and turn it into a business. Innovation and entrepreneurship are what drive economic growth. The willingness and readiness to take a risk in the hope of achieving a profit is a critical determinant of whether and how fast the economy grows. When businesses and households are risk-averse, cautious and lack confidence, the economy suffers.
Today, confidence is low. To be sure, it is up from the bottom seen at the end of the 2007-09 recession, but every measure of business and consumer confidence is far below where it was before the recession started. When confidence is low, businesses and consumers are less willing to accept risk. In an environment where businesses and consumers are risk-averse, the last thing the economy needs is more uncertainty. Yet that’s exactly what the budget debate in Washington is doing.
The federal government is in partial shutdown and is close to reaching its borrowing limit, and a major new program that affects almost everyone (the Affordable Care Act) is in the process of being implemented. Congress and the Barack Obama administration, Democrats and Republicans are at odds over just about everything. All of this is creating more uncertainty at a time when businesses and consumers are craving certainty and clarity.
How these debates are resolved will go a long way toward determining the pace of economic growth in the rest of this year and in 2014.