Congress has been unable to come to a deal to fund the federal government, which shut down Tuesday. Congress has until Oct. 17 before the Treasury exceeds its borrowing capacity, which means the U.S. will no longer be able to pay all its bills in full. This has many business leaders concerned as the knock-on effects of a possible default—even a partial default—could reverberate throughout the economy.
Lloyd Blankfein, CEO of Goldman Sachs, and other bank CEOs said they told the President they agree the long-term consequences of a shutdown would grow “extremely adverse” if the U.S. fails raise its borrowing capacity. The government has idled as many as 800,000 federal employees after Congress failed to break its partisan deadlock over whether to tie any changes to the President’s health-care law to an extension of government funding.
Ken Hicks, CEO of Foot Locker, who has lamented aspects of the 2010 health-care legislation believing it won’t curb rising costs, said the government shouldn’t be shut down over the dispute. He told Bloomberg, “Am I happy about the higher cost and lower level of care that people will get because of the Affordable Care Act? No,” but he added, “Is it worth shutting down the government over? No.”
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia, said that the shutdown—the first partial shutdown in 17 years—may subtract as much as 1.4 percentage points from economic growth, depending on its length. A lengthy budget fight risks damping consumer sentiment, cooling the auto market, restraining sales of luxury goods and hurting travel. “If this lingers for a while, it endangers the economic recovery at best,” JetBlue CEO Dave Barger told Bloomberg. “If this percolates into the psyche of business and everybody starts to back off travel spending it can trickle down to others. This is really serious.”
Matthew E. Zames, a managing director at JPMorgan Chase and the chairman of the Treasury Borrowing Advisory Committee, offers a more clear prediction: “Foreign investors, who hold nearly half of outstanding Treasury debt, could reduce their purchases of Treasuries on a permanent basis, and potentially even sell some of their existing holdings… If foreigners began curtailing their investment in Treasuries as a result of a default, Treasury rates, and thus Treasury’s borrowing costs, would undoubtedly rise. A sustained 50 basis point increase in Treasury rates would eventually cost U.S. taxpayers an additional $75 billion each year.”
Small businesses are also at risk, according to Curtis Kroeker, group GM of BizBuySell.com, one of the larger business-for-sale Internet sites. A recent study it did found confidence levels to be high among American’s looking to buy a business, as they feel they can find a business at a good price, close the deal fairly quickly, and run that business profitably. Kroeker thinks the uncertainty entailed in a prolonged debt crisis could nix this optimism.
Honeywell CEO David Cote (and 2013 Chief Executive of the Year) said that there is a danger that an unresolved shutdown may trigger another recession. “Everyone will get more conservative and pull back on hiring and investing,” Cote told Bloomberg Televsion’s Trish Regan. Cote served on Obama’s bipartisan National Commission on Fiscal Responsibility and Reform. The next dispute, over raising the nation’s debt limit from its current $16.7 trillion debt ceiling, is coming at the end of the month.