In the end, America swerved away from the edge of financial catastrophe once again. The crisis is over for now, but there are four big questions for which we don’t yet have good answers.
1. Will investors forgive America once again?
Financial markets have remained remarkably calm through the political storm, but this doesn’t mean all is well. Signs that America’s creditworthiness has eroded could take time to emerge. Washington’s 11th hour deal clearly hasn’t soothed investors’ worries. China’s credit agency Dagong lowered its U.S. sovereign credit rating from A to A- on Thursday, even after the debt ceiling had been lifted. America’s Fitch, which said on Tuesday it was pondering a U.S. downgrade, said its credit review might take until April 2014 to conclude. Fitch always expected the U.S. to avoid default, but that wasn’t enough. Among the key questions guiding its review, the agency said, are whether “the repeated brinkmanship … dents confidence in the effectiveness of the U.S. government and … in the coherence and credibility of economic policy,” and whether U.S. authorities will be able to agree on long-term tax and spending reforms. It is hard not to think that the answer to these questions depends on what happens between now and Jan. 15, which brings me to item number two on this list.
2. Will there be another crisis three months from now?
This is the question that CNN’s Brianna Keilar reportedly shouted after Obama at the end of the late night press conference that announced the signing of the deal. The president’s off-microphone answer, according to Politico, was a loud and clear “no,” but it remains to be seen whether he’s right about that.
The White House’s strategy heading into the fall was: If you don’t negotiate with “terrorists” (a.k.a Tea Party Republicans), they will stop trying to blackmail you. The president did stick to that stance, and so far everything has gone according to plan. The White House avoided default without making concessions and the GOP has seen its approval ratings plummet, including among the business community. The crucial test of Obama’s plan, though, comes in the next 90 days: Have hardline Republicans, in fact, been deterred?
3. How much did this all cost the U.S. economy?
Analysts expect the 16-day shutdown will shave between 0.2 and 0.6 of a percentage point off fourth-quarter annualized GDP growth. Standard and Poor’s estimates the federal government’s partial paralysis cost $24 billion, and consultancy IHS Global Insights said on Wednesday that the spike in short-term interest yields witnessed in the week of Oct. 14 alone will add $114 million to the federal debt.
Also, most of what economists call “soft indicators”—which give a gauge of the state of the economy based on people’s impressions and intentions rather than hard data—are revealing. Gallup’s daily index of economic confidence has been plumbing lows not seen since September 2008, the Wall Street Journal’s Sudeep Reddy noted on Thursday. And many business owners have told pollsters that uncertainty over the budget is leading them to postpone hiring and new investment.
Still, with the data blackout caused by the shutdown, it will be weeks before “hard indicators” reveal whether consumers actually held back spending and employers followed through with their plans to hold back.
4. How big are the negative spillovers for Canada?
Here too, there are few tangibles. The shutdown was relatively short—it was only the third-longest in U.S. history—and within what economists had said would yield negligible repercussions in Canada. Canadian consumer confidence dipped in the two weeks prior to the striking of the deal, according to the new Bloomberg Nanos Canadian Confidence Index, but that was coming off a two-and-half year high at the end of September. Small business optimism was still on the up as of Oct. 7, according to the Bank of Montreal.
A bigger issue for Canada is whether Democrats and Republicans will manage to reach an agreement to avert the tranche of sequester cuts that is slated to take effect on Jan. 15 (more on that here). As of now, federal spending for fiscal year 2014 is capped by law at $967 billion, even lower than the post-fiscal-cliff $984 billion of 2013. Such spending restraint would hold back economic activity and hiring in the U.S., which would, in turn, weigh on Canada.
Erica Alini is a reporter based in Cambridge, Mass., and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy.