If a deal to raise the nation’s deficit ceiling is not reached by the Aug. 2 deadline, the sky will not fall — at least right away, said Ben Herzon, a senior economist with Clayton-based Macroeconomic Advisers LLC.
“We expect a more benign scenario,” said Herzon of the 28-year-old company that provides national economic forecasting and modeling to investment banks, government agencies, Federal Reserve officials, pension funds, manufacturers and others.
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Last week, Macroeconomic Advisers provided its clients with an analysis about what it believes would occur if the deficit agreement is delayed one month. The company shared the four-page analysis with Patch. Herzon provided additional clarification, and his own opinion.
Below are some of the expected consequences.
Unemployment will increase to 9.6 percent by the end of the year.
The company believes unemployment will increase by 4/10 of a percent in the second half of this year. This translates to about 600,000 people without jobs because of the delay, Herzon said. “But a far larger number of people are likely to incur higher interest expenses,” he said.
It will be more expensive to borrow.
We will see a temporary but “modest” increase in borrowing costs indicated the company publication. “But once an agreement is made, the increase would go away,” Herzon said.
The stock market will temporarily decline by about 5 percent.
Because the stock market will be negatively impacted by the delay, household wealth will decline, and those heavily invested in equities, especially persons about to retire, will have less.
“The decline in the stock market would quickly be reversed, so the only ones hurt would be those who needed to ‘cash out’ for the month or so that the stock market would be down,” Herzon said.
Civilian and military pay would be delayed.
The U.S. Treasury is responsible for prioritizing payments, and its first goal is to meet all interest obligations on time. Between Aug. 3-31, the federal government has about $307 billion of payment commitments and about $172 billion in revenues.
According to Macroeconomic Advisers’ published analysis, $172 billion in revenues “is enough to cover interest payments on the debt, payments to defense contractors, Social Security benefits, Medicare benefits, Medicaid benefit, and unemployment insurance for the month.”
Unfortunately, all other federal payments, including civilian and military pay would be delayed. However, federal workers could face a three-week furlough.
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