US debt deadlock

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17 October 2013

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As politicians agreed to sign a deal to raise the US debt ceiling beyond $16.7tn, the Beige Book, a rundown of key macro indicators, showed signs of weakness in real estate, modest employment growth and fears lurking in the private sector.

Digesting these numbers, it will be hard for the hundreds of Federal employees to have a spring in their step as they return to their offices this morning. What’s more, extra funding has only been agreed until mid-January and the debt ceiling has been raised only until early February. The phrase the “can has merely been kicked further down the road” might well have become over used in the last fortnight, but it is certainly a fitting description for the troubles the Democrats and Republicans have stored up.

Concerns longer term

As pointed out by analysts at investment bank Societe Generale, this means that the same fiscal policy concerns loom, and could still come to fruition in the relatively near future.

Deutsche Bank’s experts agreed and pointed to the Beige Book, which is compiled by the Chicago Fed, as a worrying indicator. “The Fed’s Beige Book indicated economic activity expanded at a modest to moderate pace. In terms of overall business sentiment, the report stated that while contacts generally remained cautiously optimistic in their outlook, many noticed increased uncertainty due to the federal government shutdown and the debt ceiling debate,’ the Deutsche team said.

The book covered the stretch between 26 August and 7 October, so its pages capture fully the initial phase of the US government’s closure.

But as well as looking back and providing insight into the impact of the debt impasse, the Beige Book also asks firms about their intentions, hopes and fears for the months ahead.

Deutsche argued that it was an interesting point to note that firms in several districts had said they were cautious to expand payrolls, and had put this down to fiscal policy generally as well as new laws such as the Affordable Care Act coming into force.

Homebuilders and retailers also had concerns, though these surrounded rising mortgage rates. Taken together, there is unlikely to be appetite for a re-run of the last 16 days when politicians have to deal with the same issues further down the line.

Bright spot

Despite all of this, there is a bright spot that should not be forgotten, said Trevor Greetham, asset allocation director at Fidelity Worldwide Investment.

He spoke last night as the deadlock looked set to break, and expects the second round of debt negotiations to begin during December.

Greetham said he expected the deal eventually struck would allow both sides to save face, and in terms of markets, he was fairly upbeat.

Greetham said that with the world economy broadly looking strong, low inflation and central banks unlikely to raise rates, the backdrop for equities was “positive”.