Uncertainty shadowed the economy
Several factors contributed to economic uncertainty throughout 2011. These factors included the ongoing European sovereign debt crisis, political turmoil in the Middle East, and questions about the direction of U.S. fiscal policy. The difficult and unresolved debates in Washington over the debt ceiling and concerns about regulation, taxes, and health care costs contributed to policy-related uncertainty.
Several shocks, especially in the earlier months of the year, exacerbated the uncertainty. Severe weather and natural disasters such as the Japanese tsunami slowed economic growth substantially during the first half of the year.
The uncertainty that slowed economic growth was both a result and a cause of other factors constraining the recovery. Numerous surveys, including some from the Atlanta Fed, indicated that uncertainty—about economic performance, government policy and regulation, and geopolitical disruptions—caused many businesses to delay or forego investments and hiring.
Measuring the effects of widespread uncertainty on the economy in 2011 is difficult. For example, according to Atlanta Fed research economist John Robertson, it was unclear how much uncertainty as opposed to general economic weakness constrained hiring. Overall uncertainty was not as measurable an economic force as changes in business balance sheets or bank lending, for example. Nonetheless, it clearly affected the behavior of consumers and businesses, according to numerous anecdotal comments the Atlanta Fed gathered. A typical comment included this one from a small business owner in the real estate industry: "There is too much uncertainty in the marketplace, and we...are working closely with our owners, tenants, clients, and vendors to stay the course until consumers return to the market."
Economists at Stanford University and the University of Chicago created an index last year to measure a specific type of uncertainty related to policy. This index showed that 2011 had the highest level. Indeed, research by the index's creators
—Scott R. Baker, Nicholas Bloom, and Steven J. Davis—has indicated a connection between businesses' concerns about regulation, tax issues, and the unresolved debt ceiling and restrained corporate investment. See the chart.
In the late summer, the potential for the federal government to default on its debts arose as talks on the debt ceiling reached a stalemate. Then, Standard & Poor's downgraded the U.S. government's credit rating. Lawmakers eventually reached a temporary agreement to raise the debt ceiling. But as the year ended, the debt talks had not achieved a true consensus. Rather, political disagreement surrounded the critical task of lowering the federal government's debt burden. (See the section on adjustment and adaptation in the public sector.)
Political unrest in the Middle East contributed to rising oil prices. Popular revolutions in certain countries, violent crackdowns on some citizens in the Middle East, and ongoing concerns about proliferation of nuclear weapons contributed to a rise in global oil prices. Throughout 2011, oil prices were roughly 25 to 30 percent higher than they were in the middle of 2010.
The lingering European debt crisis was arguably the most serious uncertainty influencing the economic recovery in 2011. U.S. financial institutions worked to protect themselves by reducing their overall exposure to European banks and sovereigns. But a weakened European economy reduced demand for U.S. exports. And the potential of sovereign debt default threatened the stability of financial markets, causing some turbulence when default appeared likely. The year ended without major dramatic developments, but the debt crisis in the euro zone undermined the confidence of consumers and businesspeople in the United States. Furthermore, many economists believed Europe could be entering a recession.
Oil and commodity price shocks early in the year along with severe weather events helped explain why the nation's economy underperformed expectations in the first quarter. Moreover, the March earthquake and tsunami devastated parts of Japan and caused major loss of life. The Japanese tragedy disrupted industrial supply chains, particularly in the automotive industry. That impact was felt in the middle of the year. The International Monetary Fund wrote in its September 2011 World Economic Outlook that, according to some estimates, the number of cars manufactured worldwide may have declined by up to 30 percent in the two months after the Japanese earthquake and tsunami.
Several severe weather events in the first half of the year also affected the nation's economic performance. As early as June, the National Oceanic and Atmospheric Administration declared that 2011, with eight disasters costing more than $1 billion each, was already among the most extreme weather years in history.
All these factors constrained economic growth in 2011.