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If the debt ceiling fight isn’t resolved by August 2, then the economic consequences will be ruinous.But what about right now: Is the mere fight itself hurting the economy.
Goldman’s Andrew Tilton thinks it is.
Here’s his conclusion to a note out today, which focuses on the collapse in consumer confidence:
While it’s certainly possible that the drop in confidence reflects other factors–or simply unmeasured deterioration in the economy–the extent, timing, and composition suggests that the uncertainty surrounding the debt ceiling is probably a contributing factor. Given that the economy appears to have posted real GDP growth of only 1.5%-2% in the first half of the year, hovering near its “stall speed”, any self-inflicted wounds are particularly unwelcome. Still, a drop in confidence is only important if it affects real economic variables such as hiring or spending. We suspect the drop has put a small crimp in June spending and will continue to do so in July, via the following channels:
- Directly, via heightened uncertainty and lower expected income. Even after accounting for factors such as disposable income, net worth, and financial conditions, information on consumer confidence helps explain spending behaviour in the short term. In particular, responses to questions about expectations of the economy seem to be more highly correlated with spending than assessments of current economic conditions. (See Zach Pandl, “Confidence and Consumption”, US Daily, June 13, for more details.) The Michigan expectations index fell 9 points in its preliminary July reading, implying a slowing in the annual rate of consumer spending growth by roughly 3/4 of a percentage point based on the historical relationship between confidence and spending (holding factors such as growth in disposable income and household net worth constant). The “unexplained” portion of this drop, which could potentially be associated with worries about the debt ceiling–households’ fear or uncertainty about the potential income loss from government employment, benefits, or contracts–would imply a reduction of 0.3-0.4 percentage point.
- Indirectly, via its impact on equity prices, and consequently wealth effects. Weaker consumer confidence may also affect households’ willingness to hold risky equity assets. June saw the biggest monthly outflow from equity mutual funds since late 2008, according to AMG; weekly data show outflows 8 of the last 10 weeks. This has been accompanied by–and is presumably a counterpart of–a sharp increase in bank deposits over the last few weeks, and consequently a surge in money supply measures such as M1 and M2. The implication is that households are pulling back from risk. Insofar as this has affected equity prices, this could have some small knock-on effects on spending via lower household wealth, but reasonable parameters suggest an impact in the low tens of basis points at most.