Its outcome could mean anything from a short-term slowdown to a longer-term recession.
The United States government plays almost no role in new car loans, explains Cox Automotive chief economist Jonathan Smoke. But “the last time Congress and the president took us to the brink was in 2011, and consumer confidence fell dramatically and took several months to start to recover.”
Cox Automotive is the parent company of Kelley Blue Book.
New vehicle sales slowed in the 2011 crisis, Smoke notes, “but did not drop dramatically.” That crisis was resolved when Congress increased the debt limit.
What Is the Debt Ceiling?
The U.S. government does not bring in enough tax revenue to pay all of its bills. It issues debt in the form of bonds to make up the difference.
In a 1917 law, Congress established a limit to how much the government could borrow by issuing new bonds. Congress has periodically raised it ever since whenever the budget is unbalanced.
Raising the limit doesn’t authorize any new spending. It pays for spending Congress has already authorized in past budgets. Congress routinely authorizes spending in a budget, then later threatens not to issue bonds to pay for that spending.
But, if Congress doesn’t raise the ceiling, the U.S. government could fail to pay for everything from social security checks to keeping government offices open. It would also be unable to make interest payments toward existing bonds.
Since many of the world’s governments backstop their finances by buying U.S. bonds, a default in payments could impact the stability of economies worldwide and, in theory, trigger a global recession.
Global markets would likely have less confidence in U.S. bonds for years afterward, perhaps reshaping the global economy.
What Is the Dispute About This Time?
In this case, Republicans in the House of Representatives have proposed a plan that would raise the debt limit in exchange for a round of spending cuts. The White House wants a clean debt limit increase with no conditions because, it argues, Congress has already spent the money in years past.
Debt ceiling debates became common in the 1990s. Successive congresses and White House administrations have negotiated over possible defaults since Bill Clinton’s first term as President, usually when Republicans have controlled at least one house of Congress and Democrats have held the presidency. Like today.
Aren’t There Some Weird Ways Out of This?
Yes. Whenever this fight reemerges, things get weird.
Some legal theories argue that the law that created the limit is unconstitutional.
But debt limit brinksmanship shakes financial market confidence. To test that theory, the White House would have to hit the debt ceiling, keep paying bills, and wait for someone to sue to stop it and, likely, the Supreme Court to weigh in on whether the White House had the authority to do that. The wait could shake global confidence, with consequences potentially similar to default.
Members of Congress have proposed other exotic solutions in the past. One proposal argues that a quirk of the President’s authority over the currency would allow him to order the U.S. Mint to produce a coin worth trillions of dollars and deposit it into the treasury, instantly resetting the government’s debts well below the limit.
Such a solution would likely trigger a legal fight of its own. If you know how that would end, get in touch.
Where Is This All Likely To Go?
“I’m trained as an economist, not a weatherman,” Smoke says. “But I will say: The coming months look to be very cloudy, with a strong chance of severe storms.”
If Congress fails to raise the debt limit in time, he says, “That would likely be the tipping point for recession as negative ripple effects work through the U.S. and global financial markets. A recession would reduce vehicle demand, lead to further credit tightening, and likely push manufacturers to pull back on production.”
But past debt limit debates have never gone on that long.
“Experience suggests that the most likely scenario to unfold is a last-minute deal precipitated by big declines in financial markets,” Smoke says.
What Does All of This Have to Do With My Car Shopping Plans?
New car prices have been falling in recent months, dropping below sticker price for the first time in nearly two years. But repeated moves by the Federal Reserve to raise interest rates have led to a tight credit market, squeezing many shoppers out of the market despite lower prices.
As default nears, debt limit brinksmanship could rock the stock market, Smoke says. “Stock market declines tend to hurt luxury vehicle sales, and any slowdown will put a damper on recent signs of health in new-vehicle sales, driven largely by improving inventory and remaining pent-up demand.”
That could benefit those who can afford to car shop right now. It’s good to be one of the only buyers in the market. But few Americans have the financial resources to car shop even when a recession may be looming.
Low confidence will likely keep more buyers home until the standoff ends.
Even if the debate resolves, Smoke says, analysts are watching other factors that could rock the car market. He notes that negotiations between automakers and the United Auto Workers union are expected to heat up in the fall. Strike threats could make for even more chaos for car shoppers.