What happens now after the debt ceiling bill is passed?
Special Edition RedStone Resource
June 6, 2023
At the time of writing this piece, a deal on a debt ceiling increase was “close”. The reported deal would cap spending on most items for two years, increase defense spending by 12% from 2023 to 2025, and cut back on increased funding for the IRS. At one point, the gap between Republican and Democrat negotiators was reportedly $70B in discretionary spending, making an agreement on increasing the debt ceiling imminent.
The bigger question from a supply chain perspective is what changes a debt ceiling deal will mean for the broader economy. Can it have any impact on supply chain movement? Interestingly, history shows that there are some slight increases in activity after a debt ceiling debate or government temporary shutdown ends.
There have been more than 74 debt ceiling and budget debates over the years that have gone to the deadline or extended beyond funding authorization, each of them ending in different ways and at varying levels of impact. Some have led to the temporary furlough of Federal workers, delays in supplier contracts, and other factors that have temporarily cut spending across big swaths of the country.
But in all of those cases, most of the spending “catches up” and a wave of liquidity hits the national economy in the weeks following a temporary shutdown. The increase in national optimism knowing that it will be at least two years and a Presidential election away is enough to change how some companies think about investing in their business, hiring, and expanding over the next period of time. This issue was one of the largest roadblocks from a clean runway for the economy, and with the risk of default out of the way, normalized economic activity and fundamentals will be the driving force behind corporate decision-making.
The now-signed bill endured several weeks of negotiations between President Joe Biden, House Speaker Kevin McCarthy, and several congressional members.
Fears of the dollar plummeting, the stock market plunging, the unemployment rate going to 5%, and other factors predicted if the US had defaulted on debt payments are largely a fear of the past (assuming the deal gets inked and passed through Congress). Many consumer surveys were showing some signs that US consumers were concerned about the ongoing negotiations and have become more mindful of the Federal deficit. This debt ceiling debate has put the Federal Deficit on the front pages of every media outlet, and it has become more commonplace for discussion among every walk of consumer.
Current US consumer sentiment studies show most measures at or near all-time lows. The Michigan Consumer Sentiment Index is 38% lower than it was in 2019 just before the pandemic started (which was the highest reading since January of 2004 prior). But the index had been slowly improving from 43-year lows that were hit in June of last year, until the debt ceiling debate intensified. Over the past two months, the index had fallen from 67 points in February to 57.7 in May. In other words, getting the debt ceiling debate out of the way and allow the economy to start working on balancing itself will likely boost consumer sentiment, which could improve spending on big-ticket items and those products and services that require longer term obligations. Increasing optimism improves spending.
Corporate spending could also free up. Some companies (although they felt that a deal was imminent and that a risk of default was a long shot) have curtailed some spending and have conserved cash in some small ways over the past 60 days. Although none of these moves was draconian or on the equivalent level of prepping for a crisis, there was a moderate enough level of fear that CFOs and other financial managers were being more conservative in the near term than they wanted to be. Even in some of these organizations, a deal may free up thinking, which could free up spending.
The US may still go through some painful changes in credit ratings. But for the most part, with parts of the world going into recession (Europe primarily), the US is still the safest place in the world to keep investments. And without a more stable, safer place to invest, the country should dig out of this self-imposed crisis in a matter of weeks, and this will be behind us.
That is not to say that the unthinkable still isn’t possible (at the time of writing a deal was still not official), but it looks like we can shift our attention back to the global supply chain and the fundamentals that are pushing and pulling on it.
