Risks of Fiscal Mishap Rise as Debt and Budget Deadlines Loom

By Josh Zumbrun Features Dow Jones Newswires

The risks of a budget crisis or fiscal mishap in Washington are rising, which could weigh on financial markets in the weeks ahead.

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Forecasters in The Wall Street Journal's monthly survey of economists see the risks of some sort of fiscal mishap on the rise. They see, on average, a 22% chance of the government shutting down and a 17% chance that the U.S. Treasury will, at least temporarily, skip other obligations such as paying government payrolls or issuing Social Security checks to manage looming funding challenges.

While the House and Senate are away on their August recess, two crucial fiscal deadlines draw nearer. The Treasury has estimated Congress must act by Sept. 29 to address the nation's debt ceiling, and Sept. 30 is the end of the fiscal year, and thus the deadline for Congress to authorize legislation to keep the government functioning when the new fiscal year begins Oct. 1.

"The annual games of Debt Ceiling Roulette and Federal Budget Chicken pose greater risks than ever this year," said Amy Crews Cutts, chief economist of the credit ratings agency Equifax.

Economists see a 6% chance the U.S. will default on debt payments. While 6% is fairly low, it's double the risk from earlier this summer for a scenario that most economists believe would be calamitous.

"Default would have quick and severe effects on the economy that no party wants to bear," said Brian Schaitkin, senior U.S. economist at the Conference Board.

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The Journal surveyed 62 economists from Aug. 4 to Aug. 8.

Even if the debt ceiling is raised, a contentious debate can have significant impacts. Earlier this year, researchers at the Federal Reserve estimated the episodes in 2011 and 2013, in which Congress nearly failed to raise the debt ceiling, caused interest rates to rise, costing taxpayers about $250 million in each episode.

A Goldman Sachs research note this week cautioned that investors are starting to avoid Treasury bills that mature around this year's key fiscal deadlines, pushing up interest rates on those securities.

With Republicans in control of Congress and the White House, this isn't the postelection environment many had expected.

President Donald Trump took office pledging to swiftly repeal and replace his predecessor's health-care law, promising to give the tax code a business-friendly rewrite, and considering a $1 trillion infrastructure package to rebuild the nation's roads and bridges, while revving up factories and construction firms.

Economists in The Wall Street Journal's monthly survey were initially optimistic about this agenda. After the election, the panel of academic, business and financial economists raised their forecasts for economic growth and interest rates , and many began fretting about "upside risks" to the economic outlook -- that is, the risk that their forecasts could be wrong for not being optimistic enough.

But as the year wore on it became apparent that it wouldn't be easy to get Senate and House Republicans on the same page for an ambitious legislative agenda. Democrats have been unified in opposition. The challenge was most apparent when the Senate failed to advance its health-care bill last month.

The failed health-care bill has raised broader doubts about the legislative agenda. In January, 71% of economists in the Journal's survey said they expected a "substantial" boost to the economy from legislative changes such as a tax cut or infrastructure program. By this month's survey, just 26% expected such a boost.

"Anything that is accomplished by 2018 will be small and temporary," said Diane Swonk, president of DS Economics.

Tensions between the White House and Congress were aired publicly this week, with Senate Majority Leader Mitch McConnell (R., Ky.) saying the president had "not been in this line of work before" and had "excessive expectations." Mr. Trump responded on Twitter: "I don't think so. After 7 years of hearing Repeal & Replace, why not done?"

Without the cooperation of Congress, many of Mr. Trump's most economically significant actions have been through executive orders, such as those easing regulations at the Environmental Protection Agency, examining overtime rules at the Labor Department and ending many of the regulatory proposals in the works from his predecessor.

So far this year, the stock market has continued to rise to new records, and the economy has continued to add jobs. Congress could still come together around other issues despite what happened with health care.

"A growth-oriented tax package could lead to a surge in business investment," said Stephen Stanley, chief economist of Amherst Pierpont Securities.

But optimistic growth estimates that started the year have come down, with the average forecaster seeing 2.2% growth this year slowing to 1.9% in 2019.

"If nothing gets done, disappointment could set in," Mr. Stanley said.

(END) Dow Jones Newswires

August 10, 2017 10:14 ET (14:14 GMT)