Debt Ceiling Fears May Be Hurting Economy

The failure to increase the federal debt limit may well be part of the reason why the economy is dragging.

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Adding only 57,000 private-sector jobs in June after adding only 73,000 jobs in May is terrible news after a run of three months where we saw gains of more than 200,000 in each. The problem may, in part, be fear about whether the federal debt ceiling will be raised. Most businesses don’t ramp up hiring when they see a substantial risk of a broad economic falloff. They don’t want to be saddled with staff they don’t need if they don’t have the customers and revenue to justify the payroll costs. Right now the failure to increase the federal debt limit is creating such a risk—and that may well be part of the reason why the economy is dragging.

We’ve shown elsewhere that a two-month failure to raise the debt limit could result in the largest quarterly economic decline since 1947, when relevant data were first reported. That would obviously be a bigger decline than in any quarter of the Great Recession. And the worst quarter of the Great Recession saw a loss of nearly 2 million jobs.

Businesses are, at some level, aware of this risk and some are likely reacting to it. With leading Republicans in Congress stressing the distance between the parties, signaling their willingness to let the debt ceiling stay at its current level, and attaching extreme conditions for their support, there’s reason for those who make hiring decisions to be nervous. And that concern may be affecting the jobs market.

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