The risks to the economy from the supercommittee appear to be less severe than those accompanying the standoff in late July and early August over raising the federal debt ceiling; unlike then, there is no threat of a government debt default, but rather a series of automatic — and unpalatable — spending cuts that would occur if the committee cannot agree.
If the panel misses its Thanksgiving deadline, the deliberations could cast a cloud over the holiday shopping season, which accounts for as much as 40 percent of sales for some businesses. As the nation hovered on the brink of default over the summer, consumer confidence plunged to recessionary levels, with double-digit declines in measures of Americans’ economic views by the Conference Board and the University of Michigan.
It rattled consumers, said Shelly Sun, chief executive of Brightstar Care, which has about 6,000 home health-care workers at 225 franchises nationwide.
“Consumers felt like they had less money because of the stock market drop, and also less confidence in where the country’s going,” she said.
Still, those fears did not appear to trickle down to shoppers’ wallets. Retail sales in August, during the heat of the debate, rose a steady 0.3 percent compared with the previous month and have been increasing ever since. The Commerce Department said Tuesday that retail sales rose 0.3 percent in October, or 0.2 percent when gasoline and automobiles are excluded.
Matt Shay, head of the National Retail Federation trade group, said many retailers are assuming that federal spending will fall over time and that taxes could rise, pinching consumer spending.
As for the summer debt standoff, “I really think it affected business confidence and household confidence,” said Joel Naroff of Naroff Economic Advisors. “It created disdain, distrust and disgust in both the public and the corporate communities toward Washington, and the feeling that nothing was ever going to get done. When you see the summer slowdown, I think you have to put some of the blame on the whole debate.”
John Engler, president of the Business Roundtable, an association of top corporate executives, said he is optimistic that the supercommittee will be able to strike a deal, although he expects the members will work up until the deadline.
Still, corporate executives in various industries have grown weary of the seemingly constant brinkmanship by congressional leaders that this year has brought the government to within hours of a shutdown and led to a downgrade of federal debt after the debt ceiling debate. They hunger for a crisper, more orderly type of policymaking.
“I’m sick of it, basically,” said David Zarin, president of Zarin Fabrics, a family-owned store on the Lower East Side of Manhattan. “I feel that our politicians who are elected are not doing what should be done for the citizens of this country. They’re doing what they feel their party requires them to do.”
And the deliberations by the supercommittee do create real economic risks, beyond those involving consumer confidence. For example, if the panel cannot reach a deal and Congress reverses its earlier decision and prevents automatic cuts from happening, another of the major credit rating companies might downgrade the government’s status, as Standard & Poor’s did in August. That event caused palpitations in financial markets and rattled business confidence.
In some industries, not knowing what will come next is making it hard to plan for the future. The defense industry is a prime example; the defense budget will encounter major automatic cuts if the supercommittee cannot reach agreement, and it could face significant cuts as part of a deal.
“As we plan for 2012, the defense market is shrouded by the uncertainty of the continuing resolution and the activities of the congressional supercommittee,” Jay Johnson, chief executive of defense contractor General Dynamics, said in a recent conference call with analysts.
The committee could extend a two-percentage-point cut in the payroll tax that was enacted in January and is scheduled to expire at the end of December, as well as extend emergency unemployment benefits. Economists at J.P. Morgan Chase estimate that not extending those policies would reduce economic growth by 1.5 to two percentage points in 2012. (Congress could instead move on those policies separately from the supercommittee negotiations, although time is drawing short.)
Corporate executives in a range of industries have grown increasingly frustrated at partisan rancor over fiscal policy. Starbucks chief executive Howard Schultz has criticized Washington and pledged to withhold any campaign contributions until a deal is reached on reducing the deficit. Leaders of more than 100 companies have joined the pledge, from top executives from J. Crew, AOL and the New York Stock Exchange to small-business owners.
“We must remain steadfast, keep the pressure on and continuously remind our elected officials of the urgency we know to exist,” Schultz wrote in an open letter last month.
Some businesses have adopted the opposite strategy, urging the panel to be more aggressive.
David M. Cote, the chief executive of $33 billion manufacturing company Honeywell, was among 57 business leaders, economists and policy analysts encouraging the panel to “go big” to stabilize the economy. Cote, who served on President Obama’s commission on fiscal responsibility and reform, has said that at least $4 trillion in spending reductions and tax increases are needed.
“This is not how a great nation behaves,” he said in a statement this week. “We need to make a major commitment now in order to reassure the business community and the financial markets, restore public confidence, and create the foundation for long-term economic growth and prosperity. The faster we act, the less painful it will be for everyone.”