Quantcast
Get breaking news alerts via email

Click here to manage your alerts
How budget showdowns could squeeze the US economy


< Previous Page


Q. Will the economy escape harm if both deadlines are met?

A. Probably. But even brinksmanship can have consequences. The last major fight over the borrowing cap, in the summer of 2011, wasn’t resolved until hours before the deadline. Even though the deadline was met, Standard & Poor’s issued the first-ever downgrade of long-term U.S. credit. That, in turn, led to a 635-point plunge in the Dow Jones industrial average the next day.

Join the Discussion
Post a Comment

In August that year, consumer confidence plummeted to its lowest level since April 2009, when the economy was in recession. Spending at retail stores weakened.

"The fallout nearly caused the fragile economic recovery to stall," says Mark Zandi, chief economist at Moody’s Analytics.

The International Monetary Fund estimated last month that U.S. budget disputes, like the 2011 showdown, can slow annual growth by up to 0.5 percentage point in other parts of the world.

The Government Accountability Office later estimated that just the threat of default escalated the government’s borrowing costs that year by $1.3 billion, or about 0.5 percent.

The drawn-out fights can cause Americans to delay major purchases, such as for cars or appliances, says Ethan Harris, global economist at Bank of America Merrill Lynch. And they can erode confidence in the United States as a place to do business. Employers become less willing to expand and hire.

On Friday, the U.S. Chamber of Commerce, the National Association of Manufacturers and several other business groups urged Congress to fund the government and raise the borrowing limit.

"It is not in the best interest of the employers, employees or the American people to risk a government shutdown that will be economically disruptive and create even more uncertainties for the U.S. economy," the groups said.

Q. All this sounds pretty scary. Why aren’t financial markets panicking?


story continues below
story continues below

A. Stock prices have fallen in six of the past seven days, partly because of the looming deadlines. But the price declines have been modest. Many investors likely feel they have seen this movie before and know how it ends: with another last-minute deal.

"After several rounds of fiscal brinksmanship ... markets may be somewhat desensitized to the headlines," Alec Phillips, an economist at Goldman Sachs, wrote in a note to clients.

And much has changed since August 2011. The economy has proved more resilient. Growth has remained modest but steady despite tax increases and government spending cuts that kicked in this year. Despite widespread fears, the downgrade of long-term U.S. credit in 2011 didn’t cause investors to sell U.S. Treasurys and drive up interest rates and borrowing costs. Rates remained historically low.

The global economy is also in better shape now. Europe emerged from recession in the April-June quarter. Many investors may be poised to scoop up bargains if financial markets fall in response to Washington’s budgetary standoffs.

Previously, "those investors who’ve kept their cool have been rewarded," says David Kelly, chief global strategist at JPMorgan Funds.



Copyright 2014 The Salt Lake Tribune. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Top Reader Comments Read All Comments Post a Comment
Click here to read all comments   Click here to post a comment


About Reader Comments


Reader comments on sltrib.com are the opinions of the writer, not The Salt Lake Tribune. We will delete comments containing obscenities, personal attacks and inappropriate or offensive remarks. Flagrant or repeat violators will be banned. If you see an objectionable comment, please alert us by clicking the arrow on the upper right side of the comment and selecting "Flag comment as inappropriate". If you've recently registered with Disqus or aren't seeing your comments immediately, you may need to verify your email address. To do so, visit disqus.com/account.
See more about comments here.
Staying Connected
Videos
Jobs
Contests and Promotions
  • Search Obituaries
  • Place an Obituary

  • Search Cars
  • Search Homes
  • Search Jobs
  • Search Marketplace
  • Search Legal Notices

  • Other Services
  • Advertise With Us
  • Subscribe to the Newspaper
  • Login to the Electronic Edition
  • Frequently Asked Questions
  • Contact a newsroom staff member
  • Access the Trib Archives
  • Privacy Policy
  • Missing your paper? Need to place your paper on vacation hold? For this and any other subscription related needs, click here or call 801.204.6100.