New Mexico could lose 37,500 jobs if gov’t defaults

If the federal government defaults on its debt for a prolonged period of time, New Mexico could lose up to 37,500 jobs, according to a new report by Moody’s Analytics released May 10. This report details two possible outcomes: should the U.S. default and then correct itself in the immediate aftermath and in the event […]

New Mexico could lose 37,500 jobs if gov’t defaults

If the federal government defaults on its debt for a prolonged period of time, New Mexico could lose up to 37,500 jobs, according to a new report by Moody’s Analytics released May 10.

This report details two possible outcomes: should the U.S. default and then correct itself in the immediate aftermath and in the event of a prolonged default.

“We now assign a 10 percent probability to a breach,” the report states. “If there is a breach, it is much more likely to be a short one than a prolonged one. But even a lengthy standoff no longer has a zero probability. What once seemed unimaginable now seems a real threat.”

The expected deadline to prevent default is June 8 although due to the nature of economics, the date is subject to change, the report states.

One of the issues is that tax revenue has been substantially lower this year than last year by about 40 percent, according to the report.

“The postponement of the tax filing deadline until October 16 for disaster-area taxpayers in California, Alabama and Georgia and smaller capital gains tax receipts are the likely culprits behind the unexpected weakness in April tax revenue,” the report states. “It is also important to note that the X-date may be June 8 as we forecast, but a few days later the Treasury will benefit from a mid-June surge of quarterly payments of non-withheld taxes owed by higher-income taxpayers. As a result, the Treasury could muddle through the remainder of June, paying the government’s bills on time. This could reduce the immediate pressure on lawmakers to act, although that will likely depend on how financial markets react.”

Meanwhile in New Mexico

New Mexico could be adversely affected should a prolonged default occur.

New Mexico has a larger population of government employees than most states with its two national labs, three Air Force bases, five National Forests, 18 National Park sites including two designated National Parks and the White Sands Missile Range, which is run by the U.S. Army.

Aside from the federal installations and jobs they create in New Mexico, there are also state revenue issues that could arise from a breach.

“On average, one-third of state revenue comes directly from federal grants to help pay for public services like health care, education, and infrastructure,” Pew Charitable Trust fiscal federalism project manager Rebecca Theiss said in a statement. “Federal spending also helps sustain states’ economies and tax revenues through things like military contracts, employee wages, and payments to individuals, including food stamps and social security benefits.” 

The report shows that should there be a short-term default, even lasting a few days, New Mexico could lose about 5,000 jobs in that time.

The unemployment rate under a short-term default would rise to 5.2 percent versus the current rate of 3.5 percent. Should a default last longer, the unemployment rate would rise to 7.7 percent.

Two scenarios, one economy and a similar event in recent history

Even with attempts by the highest ranking members of the U.S. government to find an end to the debt limit crisis, an end, so far, is not in sight.

Should the government default, there are two scenarios that could happen: a default lasting less than a week and one that lasts longer.

One of the most immediate effects would be a stock market drop and “a TARP moment seems likely,” the report states.

“This hearkens to the dark day in autumn 2008 when Congress initially failed to pass the Troubled Asset Relief Program bailout of the banking system, and the stock market and other financial markets cratered,” the report states. “It is difficult to fathom that lawmakers would allow things to get to this point, but as the TARP experience highlights, it cannot be dismissed. Still, if that harrowing experience is a guide, lawmakers would quickly reverse course and resolve the debt limit impasse to allow the Treasury to resume issuing debt again and pay its bills.”

So far, it is unknown if the U.S. credit rating were to remain intact at AA+ following a debt default, however, should the credit rating fall as it did in 2011, the effects could be devastating.

“A downgrade of Treasury debt would set off a cascade of credit implications and downgrades on the debt of many other financial institutions, nonfinancial corporations, municipalities, infrastructure providers, structured finance transactions, and other debt issuers,” the report states. “Those institutions that are clearly backstopped by the U.S. government, institutions such as Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, would suffer the biggest changes to their ratings. The effects on other institutions’ ratings would vary depending on their relationship with the U.S. government and offsetting financial strengths.”

However, the nation’s credit rating could remain intact and the deluge of issues to downgrade would damage the country’s already fragile economic system, even if the default were to be undone less than a week after a default occurred, the report states.

“Despite lawmakers’ quick reversal in this scenario and our assumption that the rating agencies do not engage in downgrades, considerable damage will have already been done,” the report states. The timing could not be worse for the economy; even without the specter of a debt limit breach many CEOs and economists believe a recession is dead ahead.”

Goldman Sachs reported in January that the possibility for a recession occurring in 2023 was between 25 and 65 percent.

“With the Federal Reserve ramping up interest rates to quell wage and price pressures, avoiding a recession would be difficult even if nothing else went wrong,” the Moody’s report states.

Should a default happen and not be immediately corrected, the outcome would be beyond catastrophic, according to the Moody’s report.

“We assume in these circumstances that the credit rating agencies would downgrade Treasury debt, precipitating widespread downgrades throughout the financial system,” the report states. “The federal government would have no option but to slash its outlays, since outlays could be no greater than revenues the Treasury collects. Assuming a June 8 debt limit breach that dragged on through July, the Treasury would have no choice but to eliminate a cumulative cash deficit of approximately $150 billion by slashing government spending. As these cuts work through the economy, the hit to growth would be overwhelming. Adding to the economic turmoil would be the damage to consumer, business and investor confidence.”

Adding to this damage is the ongoing political debate surrounding the debt ceiling that has both those in the financial sector and average Americans feeling uneasy about the country’s economic future.

This uneasiness, as witnessed in the previous debt ceiling issues in 2011 and 2013 lead to consumer sentiment slumping, the report states.

“The brinkmanship is also unnerving for businesses that will curtail investment and hiring, and for financial institutions that will quickly turn more cautious in extending credit to households and businesses,” the report states.

Moody’s predicts that a protracted economic downturn would have comparable effects to those from the Great Recession when it comes to the stock market, unemployment and other economic factors.

While the deadline approaches, the White House and congressional leadership plan to meet Friday following an initial meeting Tuesday afternoon.

In the days leading up to the Friday meeting, staff from the White House and congressional leadership are expected to meet daily to work on a plan.

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