U.S. Treasury Secretary Jacob J. Lew is trying to persuade Congress to raise the $16.7 trillion debt ceiling without the drama that contributed to a stock market rout in 2011. A stronger economy this time around may help keep investors calm.
In August 2011, when Congress agreed after months of haggling to increase the debt limit on the day the government’s ability to borrow was to run out, unemployment was 9 percent. Last month it was 7.4 percent, the lowest since December 2008. Consumer confidence, sinking back to recession levels two years ago, is now close to a five-year high. The budget deficit, $1.3 trillion in 2011, is projected by the Congressional Budget Office to shrink to $642 billion this year.
“The economic backdrop is definitely different this time,” said Joseph Lavorgna, the New York-based chief economist at Deutsche Bank AG. “Two years ago we had a serious fear of recession risk, of a double-dip. We have a much healthier economy, or the sense that things are getting better. The labor market best reflects that.”
When Congress returns from its recess on Sept. 9, lawmakers and the Obama administration will confront fiscal decisions that include funding the government by Sept. 30 to avoid a federal shutdown and raising the debt ceiling. Republican lawmakers are demanding spending cuts, while Lew argues that austerity and “brinksmanship games” over increasing the debt limit could stifle the recovery.
So far, the rhetoric from both parties suggests an agreement won’t be reached quickly. House Speaker John Boehner said July 23 his party wouldn’t increase the debt ceiling “without real cuts in spending” that would achieve a further reduction in the deficit. Lew, in TV interviews that aired five days later, insisted that he and President Barack Obama won’t negotiate on the debt limit.
“We can’t afford self-inflicted wounds and we can’t have these kinds of self-created crises month after month, year after year,” Lew told ABC’s “This Week” program. “We saw how bad that was for the economy in 2011.” The debt-limit debate adds uncertainty by raising the question of whether the U.S. will default on its obligations, he said.
The Treasury has said it probably will be able to finance government operations by using special accounting measures until after Congress returns. The Bipartisan Policy Center, a nonprofit research group, projects the U.S. will reach the point where it is unable to pay its bills sometime between mid-October and mid-November unless Congress increases the limit.
The last time the Treasury was in this position, in 2011, the negotiations “put the brakes on for a lot of businesses as far as hiring and capital spending decisions they were making at the time,” said Omair Sharif, a U.S. economist at RBS Securities Inc. in Stamford, Connecticut.
In July 2011, at the height of the debt-limit stalemate, Americans were applying for unemployment benefits at the rate of more than 400,000 a week. That figure was down to 320,000 in the week ended Aug. 9, the fewest since before the recession started in 2007.
In the two weeks before a debt-limit deal passed on Aug. 2, 2011, the Standard & Poor’s 500 Index (SPX) fell 5.5 percent. This month, the index reached a record high. The index fell 0.6 percent to 1646.06 at the close of today’s trading in New York.
This year’s talks “should have less of an impact now on the economy and markets, partly because the last couple of experiences have taught us that it will get done,” Sharif said.
Financial markets “have learned to ignore political uncertainty, given how frequently it has happened in the last two years,” said Ajay Rajadhyaksha, who follows fiscal issues in Congress as the New York-based co-head of fixed income, currencies and commodities research at Barclays Plc.
A stopgap measure called the continuing resolution to fund the government after Sept. 30 could be more contentious than the debt limit, Rajadhyaksha said. Some Republicans are advocating a continuing resolution only if it withholds funds to implement Obama’s health-care law, set to take effect Jan. 1. Republicans in Congress are split over the wisdom of that tactic.
Automatic, across-the-board budget cuts of $109 billion are also looming with the fiscal year that begins Oct. 1, after $85 billion in cuts that took effect in March. Obama wants to end automatic cuts, while the Republican-controlled House has shown little inclination to avoid them. The forced spending cuts, known as sequestration, have been a drag on the economy.
In addition to the improvement in labor markets, home prices rose in May by the most in more than seven years, and houses are selling at an annual rate of more than 5 million, compared with 4.4 million in August 2011.
Federal Reserve stimulus helped push the S&P 500 more than 150 percent above its low in 2009. The rally that sent the index up 20 percent in 2013 to a record 1,709.67 on Aug. 2 was the broadest in at least 23 years, with 445 companies higher for the year on that date.
In the 2011 debt ceiling debate, lawmakers and the White House battled for months before Obama signed an increase into law on Aug. 2, the day the Treasury Department warned that U.S. borrowing authority would expire.
Standard & Poor’s, which downgraded the U.S. one step to AA+ three days later, changed its outlook in June of this year to “stable” from “negative.”
Though the downgrade by S&P, the world’s largest credit rater, contributed to a global stock-market slump, U.S. government debt lost none of its attraction for investors. Yields on Treasury securities dropped to record lows rather than going higher after the downgrade. Yields on 10-year Treasuries dropped 0.74 percentage point in the seven weeks following the downgrade to a then-record 1.67 percent.
In the end, Congress will raise the ceiling in time for the Treasury to continue borrowing because it doesn’t want to be seen as responsible for the U.S. defaulting on its bills, Sharif said.
“The debt limit will get raised, and the U.S. is not about to default,” he said.
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