The US administration’s current approach to decision-making has raised concerns about the stability and predictability of the nation’s economy. Now one person makes all the important calls, leading to wild swings in policy direction. As a result, we’re in a more precarious position for risks and challenges to economic forecasting. Consequently, a growing chorus of analysts are sounding alarms that investors will increasingly need to be on their guard in the face of the changing economic conditions.
Perhaps most notable is that recent observations point out how today’s signposts, which in the past offered predictive clues on policy changes, are worth little now. This change has introduced a new element of uncertainty. As a result, experts have a difficult time predicting the direction of the US economy. Making one person solely responsible for the decision-making process automatically adds layers of complexity. This has resulted in rapid-fire policy changes and uncertainty about what’s coming next.
As Paul Donovan, economist at UBS, put it in his warning against this concentrated decision making. He went on to say, For one thing, erratic policy decisions in a variety of areas have inserted a sizable risk premium into the US economy. Second, policy decisions are very reversible, and there are even less in the way of signposts for what policy decisions will be made. Previously, investors paid acute attention to the opinions of cabinet members and senior officials. They applied these learnings to be in front of changes in policy. With decision making concentrated so heavily on one person, those signposts are little more than historical footnotes today.
The uncertainty created by this wave of capricious policy packs a big punch. Financial and economic models are generally heavily based on quantifiable inputs that produce future forecasts. As Donovan put it, “Adding in unpredictability and unintended consequences goes a long way toward wiping out any claim to precision when forecasting the US economy. The weightings affixed to these risk scenarios are consequently elevated.” This is significant because it requires investors to factor in a higher level of risk when evaluating future economic benefits.
Therefore, US administration decisions will have a substantial impact beyond policy shifts. At the same time, they have imposed a highly regressive economic risk premium on the entire economy. Investors are quickly learning that major unforeseen disruptions can result when re-policy is enacted too quickly. “The fact that policy decisions have been made quickly, by people who do not always have prior government experience, has introduced unintended consequences—either forcing policy reversals or causing economic disruption,” noted an anonymous source reflecting on the current climate.
The professionalism with which policies are developed will be an increasing point of investor focus going forward. As the administration keeps zig-zagging through quicksand on issues with far fewer moving parts, the confidence of investors will start to run out. Rapid and erratic policy decisions constitute an even greater risk. These risks are causing investor reluctance, making our current economic environment even more challenging.