With all of Washington atwitter with the possibility of a government shutdown starting at midnight, economics and investors have another worry: the debt ceiling. Even if Congress manages to agree to keep the lights on for another week or two, they still need to increase the federal government’s legal authority to borrow money so that it can pay interest on its debt and appropriations passed by Congress.
According to the Treasury and outside experts, the so-called “X-Date,” when the federal government cannot borrow money to pay its bills, starts midnight, Oct. 18. More than two years ago, thanks to a standoff between the Republican-controlled House and President Obama over spending, the government creeped right up to the debt limit but managed to avoid it thanks to a last-minute deal. But that didn’t stop the crisis from affecting the real economy.
1. Consumer Sentiment
The University of Michigan Consumer Sentiment Index is one of a few surveys that track how individuals feel about their own personal financial situations and the long- and short-term prospects for the economy. It hit its second-highest point in April 2011 and then immediately started to decline. Why?
Later that month, the House and Senate finally passed a budget for the 2011 fiscal year, and the projected deficit spending ensured the federal government would hit up against the statutory debt ceiling sometime in 2011. It kept on tanking through May and June. The debt ceiling was actually hit in May, after which then-Treasury Secretary Tim Geithner instituted what are known as extraordinary measures to keep the government funded without going above the statutory limit, but that would only buy about six weeks of time; the so-called “X-Date” was sometime in late July or early August, after which the federal government would not be legally able to meet all of its commitments.
2. The S&P 500
The S&P 500 started falling precipitously in late July, as the government creeped closer and closer to a default on its debts and the possibility of another financial crisis. Stocks had been rising fairly steadily for about a year until late July when, they plunged more than 15% in less than a month. While this can’t all be attributed to the near-miss on the debt ceiling — the European sovereign debt crisis was near its worst point that summer — monkeying around with the full faith and credit of the United States certainly didn’t help.
Job growth had been solid but unspectacular in the beginning of 2011, as it has been since the end of the recession. For the first five months of the year, job growth averaged just over 193,000 new jobs a month. In the three months that contained the run-up and then last-second second resolution of the crisis, jobs growth plunged to just under 140,000 new jobs a month. These few data points, on their own, wouldn’t be enough to show a relationship, but combined with the stock and consumer sentiment data, the jobs growth numbers suggest that employers seized up in the summer of 2011.
4. Treasury Bonds
This one is a bit more complicated. Investors tend to buy U.S. debt when the economy starts slowing down or they think other types of assets — stocks, corporate debt, other sovereign debt — have gotten too risky or more risky than they thought. What’s weird about the plunge in the government’s borrowing costs that started in April is that, in theory, breaching the debt ceiling and not being able to make interest payments on the U.S. government’s debt would make investors demand higher interest rates and thus drive up borrowing costs. But when an economic panic is happening, or investors think one is about to, they tend to pile into the safest asset they can find, and that’s still Treasury bonds.
And right before and right after the debt ceiling crisis, that’s what happened. Interest rates fell and then dropped off a cliff in August. Some of this was, once again, the European debt crisis getting particularly awful that summer, but it still showed a general unwillingness among investors to put money toward anything but the safest assets.