Less than 24 hours before the U.S. Treasury Department ran out of room to borrow, Congress arrived at an agreement to reopen the government and steer away from debt default. This news came as a great relief, but that feeling may only last a few months. Following are some highlights and an initial analysis of the accord.
- A continuing resolution has granted spending authority that should last U.S. government departments through the middle of January. The onset of the next round of automatic cuts (known as the sequester) will not take force until then.
The hope is that budget discussions in the coming months will arrive at a more nuanced approach to spending control than the blunt method contained in the sequester.
- The debt ceiling has been suspended until February 7. This means that the Treasury can borrow to meet its expenses through that date, adding to the debt ceiling on a flow basis. This design is similar to the accord reached last May.
Importantly, the legislation allows the Treasury to retain the ability to use “extraordinary measures” when the debt ceiling nears. Functionally, this suggests that the debt ceiling will not become binding again for another five months or so.
- A bipartisan negotiating committee will be appointed to recommend solutions to the nation’s long-term spending challenges, with a report due in mid-December. Unfortunately, past versions of these groups have not been very successful.
- Only minor changes were made to the Affordable Care Act, centering on income verification for those due to receive subsidies for buying insurance. Broader issues in American health care, which have a much more substantial effect on our national finances, were not addressed.
- The financial markets breathed a clear sigh of relief at the news of an accord. The S&P 500 rallied close to its record level, and the yield on certain short-term Treasury bills fell from nearly 50 basis points overnight on Tuesday to 14 basis points at Wednesday’s close.
Market Indicators Around the Penultimate Day
- Federal agencies will reopen this morning. Employees will receive back pay for the two weeks that they were furloughed. Most expect that this feature of last night’s accord will help limit the impact of the shutdown on this quarter’s economic growth.
We are still awaiting word on when the normal flow of economic data will resume; delays may depend on the series in question. The furlough of public and private employees will certainly muddy readings for the month of October.
- Our sense is that the shutdown and the associated uncertainty around the debt ceiling will reduce fourth quarter economic growth by about 0.3%. Longer term impacts will depend, in part, on the effect this unhappy episode has had on business and consumer confidence.
It is certainly possible that the United States will be back at the brink next spring. March is primary election season; there is money to be raised and there are votes to be garnered. Taking a hard line may be beneficial to incumbents on both fronts.
But yesterday’s outcome must be viewed as superior to the alternative of a debt ceiling strike and the potential for associated market turbulence.
We’ll have some more significant editorial thoughts on the American fiscal saga in our weekly column tomorrow morning.
© Northern Trust
