Economic Uncertainty – Historical Definition
If you think of the economy as a train pulling a load on the track, you would base its near future position on its current and historical trend. It is unlikely its current speed will change; thus, we can predict its future position with some degree of confidence. The short-term position is easier to determine with greater conviction and accuracy than 3 to 6 time periods out. Why does our confidence decrease the further out in time the train travels? Inherently, we know that there are variables that can impact the outcome. What if the train slows down? What if there is engine trouble? Worse yet, what if the track is blocked and the train must stop to wait for repairs?
In economics, these unknown variables are referred to as uncertainty. Uncertainty is typically measured and reported at the macro level. This is due to vast resources available to predict the economic results in the near future with a high level of certainty. Again, the further out in time the prediction is made, the more uncertain the forecast becomes.
Economic uncertainty is rarely reported at the micro level. In effect, each of the industry groups, or even at the corporate level, has to take into consideration all the factors that impact their respective situation. The U.S. Federal Reserve prepares economic uncertainty reports and provides data for a slew of variables such as:
- Foreign Trade Policy
- Interest Rates
- Consumer Debt
- Manufacturing Production
At the micro level, this isn’t prevalent; thus making it difficult to evaluate economic uncertainty, especially for a small business.
The end result is that economic uncertainty is a macro level term defining the ability of the economy to continue on its current path in the near and long-term.
Economic Uncertainty – Modified Definition
The term ‘economic uncertainty’ is used with the application for a loan under the Paycheck Protection Program administered under the Small Business Act. On page 2 of the application, the 2nd certification uses the term ‘economic uncertainty’. In effect, the applicant states that the current economic uncertainty makes the loan request necessary. It is here that the historical definition comes into play. The macro level of uncertainty, i.e. the current COVID-19 pandemic affects the ability of the applicant to continue operations. Therefore, the applicant must take into consideration the macro factors and customize them to their respective operation, i.e. convert economic uncertainty to the micro level.
Interestingly, the text of the Congressional Act (Public Law 116-136) provides guidance for the applicant. Under Section 1103(a)(4) there are either three criteria experienced or a separate fourth condition to qualify. They are:
(D) is easy to understand. Those businesses mandated by state government to close, commonly referred to as ‘non-essential’ meet the requirement and easily qualify to affirm economic uncertainty. Those in the marginal areas will run into problems validating economic uncertainty. A good example would be a company servicing restaurants such as the linen service provider or meat vendor. These businesses will experience a decrease in sales but not a total stop to operations. Will they qualify?
The Act specifically states that all three A, B, & C must be experienced. Thus, those operations that slow down in overall production and sales will most likely not qualify for the Paycheck Protection Program. The applicant must document and provide substantial evidence of all three minimum criteria. This will be difficult as all criteria have its own set of nuances. For example, under (A)(iii), how does the applicant substantially prove technological difficulties? Will the fact that certain customers are closed and therefore they do not respond to phone calls and e-mail qualify?
The real question is how much change must be experienced to qualify for certification related to economic uncertainty. It is the author’s opinion that the change in the aggregate must equate to more than 25%. At the individual variable level, the change must be a minimum of 5% but that in the aggregate, all three variables must add up to a minimum change (overall production) of no less than 25%. Any change less than 25% can be the result of factors not related to COVID-19 and the associated macro response. The key is to be able to convince a court of law that the applicant experiences economic uncertainty directly related to the current economic situation. The greater the impact, the more likely the courts will agree that at the micro level the applicant is experiencing economic uncertainty. ACT ON KNOWLEDGE.