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Impact Of The Debt Ceiling Debate On The U.S. Economy--Getting Worse By The Day

Publication date: 16-Oct-2013 16:05:58 EST


NEW YORK (Standard & Poor's) Oct. 16, 2013--The U.S. government has been shut 
down for more than two weeks. Earlier today, Senate leadership crafted an 
agreement to end the shutdown and avert a debt default. However, the deal 
needs to be voted on by both chambers of Congress.

We believe that to date, the shutdown has shaved at least 0.6% off of 
annualized fourth-quarter 2013 GDP growth, or taken $24 billion out of the 
economy. However, the closer we get to breaching the debt ceiling, the higher 
we expect the economic impact to be.

In the summer of 2011, as we approached the last debt ceiling standoff, 
consumer confidence plummeted and hit a 31-year low in August when the debt 
ceiling issue came to a head. Given that this round of debt-ceiling 
negotiations is occurring after two-plus weeks of a government shutdown, the 
total impact on the economy will likely be even more severe.

While we believe the Senate deal will be passed and the debt ceiling will be 
raised, the impact of a default by the U.S. government on its debts would be 
devastating for markets and the economy and worse than the collapse of Lehman 
Brothers in 2008.

Should a default occur, the resulting sudden, unplanned contraction of current 
spending could see government spending cut by about 4% of annualized GDP. That 
would put the economy in a recession and wipeout much of the economic progress 
made by the recovery from the Great Recession.

As we've said, we expect the Senate deal to be approved. However, the current 
chatter coming out of Washington suggests that any continuing resolution will 
be a temporary one, with an early 2014 timeframe for the next set of 
Washington deadlines. The short turnaround for politicians to negotiate some 
sort of lasting deal will likely weigh on consumer confidence, especially 
among government workers that were furloughed. If people are afraid that the 
government policy brinkmanship will resurface again, and with it the risk of 
another shutdown or worse, they'll remain afraid to open up their checkbooks. 
That points to another Humbug holiday season.

The bottom line is the government shutdown has hurt the U.S. economy. In 
September, we expected 3% annualized growth in the fourth quarter because we 
thought politicians would have learned from 2011 and taken steps to avoid 
things like a government shutdown and the possibility of a sovereign default. 
Since our forecast didn't hold, we now have to lower our fourth-quarter growth 
estimate to closer to 2%.

Standard & Poor's Ratings Services, part of McGraw Hill Financial (NYSE: 
MHFI), is the world's leading provider of independent credit risk research and 
benchmarks. We publish more than a million credit ratings on debt issued by 
sovereign, municipal, corporate and financial sector entities. With over 1,400 
credit analysts in 23 countries, and more than 150 years' experience of 
assessing credit risk, we offer a unique combination of global coverage and 
local insight. Our research and opinions about relative credit risk provide 
market participants with information and independent benchmarks that help to 
support the growth of transparent, liquid debt markets worldwide.
U.S. Chief Economist:Beth Ann Bovino, New York (1) 212-438-1652;
bethann.bovino@standardandpoors.com
Media Contact:Edward P Sweeney, New York (1) 212-438-6634;
edward.sweeney@standardandpoors.com

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