The Commerce Department reported this morning that 2Q GDP increased by only 1.5% (annual rate). This was the first of three estimates on 2Q growth. Actually, the 1.5% number was slightly ahead of the pre-report consensus of 1.2% and considerably better than some late estimates that the number would come in below 1%. The stock markets opened higher as a result.
The Commerce Department also revised its 1Q GDP number up slightly from 1.9% reported earlier to 2%. The modest growth of 1.5% in the 2Q was driven primarily by consumer spending, exports, non-residential fixed investment and inventory building. I will have more detailed analysis on today’s GDP report in my E-Letter on Tuesday, along with some other recent economic reports.
Let’s shift gears now and turn to another familiar key issue: the debt ceiling problem. As you will no doubt recall, the debt ceiling battle a year ago was a real nail-biter that literally risked a default by the US government. At the last minute, Congress and the president agreed to a deal that would raise the debt ceiling to $15.2 trillion at the time, and increase it to $16.4 trillion in January of this year.
If you go to USDebtClock.org, you will see that our national debt is now up to $15.9 trillion. The big question is, will we hit that $16.4 trillion limit before the election on November 6, or before the end of the year? Actually, it’s not really a question – we will hit the $16.4 trillion level before the end of the year. The real question is: What happens then?
The Treasury Department has some accounting gimmicks it can use to fund government expenditures for a relatively short period of time after the debt ceiling has been hit. Treasury Secretary Geithner says that he has enough of these “tools” to keep the government afloat until early 2013. But that all depends on when we hit the statutory limit of $16.4 trillion.
Based on what the government has spent so far this year, we could hit the debt ceiling limit as soon as September 30. If so, it is doubtful that the Treasury accounting gimmicks can carry Uncle Sam all the way to January.
Thus, it is very likely that we will have to face another gut-wrenching debt ceiling battle before the end of the year. I’m sure you remember the contentious issues: Democrats want to raise taxes, and Republicans want to cut spending. What else is new?
The Republicans “prevailed” last summer (if you can call it that). This time, however, President Obama and the Democrats think they have the leverage, primarily because we have a big election in November. Obama and leading Democrats are betting that Republicans won’t risk another government shutdown just before a politically-charged election.
Republicans fear that President Obama and Mr. Reid want a debt ceiling shutdown battle before the election. If the GOP bends, Democrats will get more spending and demoralize GOP voters. If House Republicans resist, Mr. Obama will blame the prospect of a shutdown on them. This could also put Mitt Romney into a very tough political spot. “Ambush” comes to mind!
It makes sense to try to avoid this ambush, which is what GOP Senators Jim DeMint of South Carolina and Ron Johnson of Wisconsin have been proposing behind the scenes. They want the GOP House to pass a continuing spending resolution budget, or CR, that would fund the government into 2013. The funding would be at the level of the $1.047 trillion spending cap for 2013 that was part of last year’s debt-limit agreement.
This would take a government shutdown off the table until next year. The question is, will the Democrats go along? Or do they really want a debt ceiling shutdown battle going into the election?
Normally, I would say no. Normally, I would predict that the Dems would make a big racket over the continuing resolution to avoid the shutdown, but they would ultimately go along with it in the end. And that may yet happen.
However, today’s Rasmussen daily presidential tracking poll has Governor Romney ahead of the president by +5 (49 to 44), his biggest lead so far. If this trend continues, then I would not rule out anything by the Dems. Stay tuned!
Have a great weekend everyone!