Deal lifts markets but does little for US economy
By CHRISTOPHER S. RUGABER AP Economics Writer October 16, 2013 5:20PM
Speaker of the House John Boehner, R-Ohio, returns to his office after a meeting with House Republicans at the Capitol in Washington, Wednesday, Oct. 16, 2013. Earlier, Senate leaders reached a last-minute agreement to avert a threatened Treasury default and reopen the government after a partial, 16-day shutdown. (AP Photo/J. Scott Applewhite)
Updated: October 16, 2013 5:20PM
WASHINGTON (AP) — The budget agreement Congress reached Wednesday cheered investors and removed the threat of a catastrophic debt default that could have triggered another recession.
Yet the temporary nature of the deal means a cloud will remain over a sluggish U.S. economy that was further slowed by the government’s partial shutdown.
Political fights over taxing and spending will persist over the next few months. The risk of another government shutdown and doubts about the government’s borrowing authority remain. Businesses and consumers may still spend and invest at the same cautious pace they have since the Great Recession officially ended more than four years ago.
The agreement, expected to be approved by the House and Senate late Wednesday, will reopen the government but only until Jan. 15. The deal would enable the United States to keep borrowing to pay its bills, but not past Feb. 7.
The deal followed a two-week shutdown and came a day before a Treasury Department deadline to raise the nation’s $16.7 trillion debt limit.
“The good news is that we avoid hitting the debt ceiling and all the risks that entails,” said Joel Prakken, co-founder of Macroeconomic Advisers, a forecasting firm. “The bad news is ... this hasn’t produced any clarity. We’re going to be right back at this again after the turn of the year.”
The stock market soared on the news. The Dow Jones industrial average jumped 206 points. Bond investors celebrated, too. They sharply drove down the yield on the one-month Treasury bill, which would have come due around the time a default could have occurred. And the yield on the 10-year Treasury, a benchmark for rates on mortgages and other loans, fell.
Investors may now turn to what typically moves stock prices: corporate earnings and economic data. Wall Street is in the midst of earnings season.
“We can go back to focusing on the true reason why stocks are higher: the rebound in housing, rising corporate profits, the resurgence in manufacturing,” said Doug Cote, chief investment strategist for ING U.S. Investment Management.
By itself, the partial government shutdown will have only a limited effect on economic growth, analysts said. Most forecast that the shutdown will dent growth by about 0.15 percentage point per week. But federal employees will receive back pay, suggesting that much of the lost spending could be made up.
Economists at Bank of America Merrill Lynch have cut their forecast for growth in the October-December quarter to an annual growth rate of 2 percent from an earlier estimate of 2.5 percent.
“The U.S. economy dodged a bullet today,” said Paul Edelstein, an economist at IHS Global Insight. “But the reprieve will be short. ... The stage is set for another showdown in January.”
IHS lowered its forecast for growth in the October-December quarter to a 1.6 percent annual rate from a 2.2 percent rate.
The new deadlines to fund the government and raise the borrowing limit that are now a few months away could also weigh on growth in the first quarter of 2014.
A study by Prakken’s firm found that uncertainty over future government policies tends to raise borrowing costs for businesses and consumers, depress stock markets and lower business and consumer confidence. Uncertainty surrounding government tax and budget policies has remained far above historical norms since 2009, Prakken said.
Higher borrowing costs typically make companies less likely to invest and hire. Lower stock markets reduce household wealth and can cut into consumer spending. Macroeconomic Advisers estimates that these factors have slowed growth by 0.3 percentage point each year since 2010.
A report from the Federal Reserve on Wednesday offered fresh evidence of the economic impact of the shutdown and debt limit fight. The Fed’s report on economic conditions in its 12 banking districts found that employers in several districts were reluctant to hire because of uncertainty surrounding budget policies and the new health care law.
Manufacturing growth slowed in the New York region in October, builders were less confident in the housing recovery and growth slowed in four Fed districts. All the reports cited the federal shutdown and impasse over the debt limit as reasons for the declines.
Several companies have also cited the shutdown as a likely drag on sales and earnings. Stanley Black & Decker, the tool maker, on Wednesday lowered its profit forecast for this year. It blamed, in part, “uncertainty created by the U.S. government’s (budget cuts) and shutdown and its impact on business, consumer confidence and spending levels.”
Linear Technology, a semiconductor company, on Tuesday lowered its revenue outlook for the final three months of the year because of the shutdown.
The full economic impact could take a month or more to assess because the release of so much economic data has been delayed. And Drew Matus, an economist at UBS, says that much of the economic data will be distorted by the effect of the shutdown, making it harder to discern underlying trends.
Weekly applications for unemployment benefits, for example, spiked last week, partly because of workers who were temporarily laid off by government contractors and other affected companies. Those figures are collected by the states.
“We’re in the dark,” says Robert DiClemente, chief U.S. economist at Citigroup. “It’s going to be a while until we have good answers to all these questions.”