US Credit Rating Downgraded by Fitch

Reuters
By Yuval Rosenberg

Welcome to August! Former President Donald Trump has reportedly been indicted again, this time on federal conspiracy and obstruction charges related to efforts to overturn his loss in the 2020 election. Trump now faces criminal charges in three separate cases — two federal and one in New York, with additional charges potentially coming in Georgia as soon as this month.

Here’s what else is happening.

U.S. Credit Rating Downgraded from AAA by Fitch

Fitch Ratings downgraded the long-term credit rating of the United States from AAA to AA+ on Tuesday, citing the U.S. government’s debt burden and its “expected fiscal deterioration over the next three years.”

Fitch, one of three major agencies that evaluate the credit worthiness of companies and countries, also pointed to what it called an “erosion of governance” over the past two decades — a change, it says, “that has manifested in repeated debt limit standoffs and last-minute resolutions.”

The agency in May had placed the U.S. rating on “negative watch,” indicating that a downgrade might be coming after a bruising political battle over raising the debt limit. House Speaker Kevin McCarthy and a newly empowered Republican House majority had insisted on spending cuts and other demands in exchange for raising the federal borrowing limit. A bipartisan deal to suspend the limit until 2025 was signed into law in early June, just days before the Treasury was poised to potentially default on its obligations.

“The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management,” Fitch said. “In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process. These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade. Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.”

Fitch projects that the “general government deficit” will rise from 3.7% of GDP in 2022 to 6.3% in 2023, 6.6% in 2024 and 6.9% in 2025. It also warned about the longer-term outlook. “Over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms,” it said. “Additionally, the 2017 tax cuts are set to expire in 2025, but there is likely to be political pressure to make these permanent as has been the case in the past, resulting in higher deficit projections.”

Biden administration ‘strongly disagrees’: Treasury Secretary Janet Yellen said in a statement that she “strongly disagrees” with the decision, which she called “arbitrary and based on outdated data.” She argued that the indicators Fitch uses declined between 2018 and 2020 but have improved under the Biden administration. She added that the administration has passed bipartisan legislation to address the debt limit and invest in infrastructure and U.S. competitiveness.

The White House also said it “strongly disagrees” with the decision but also blamed Republicans for undermining the economy. “The ratings model used by Fitch declined under President Trump and then improved under President Biden, and it defies reality to downgrade the United States at a moment when President Biden has delivered the strongest recovery of any major economy in the world,” White House Press Secretary Karine Jean-Pierre said in a statement. “And it’s clear that extremism by Republican officials—from cheerleading default, to undermining governance and democracy, to seeking to extend deficit-busting tax giveaways for the wealthy and corporations—is a continued threat to our economy.”

Why it matters: Ultimately, the Fitch move may be more significant for its political and symbolic effects than its fiscal or financial ones, similar to the downgrade by Standard & Poor’s in 2011.

“My sense is that the Fitch downgrade of the US credit rating is an insignificant development and will not move financial markets or the economy,” RSM Chief Economist Joseph Brusuelas said on the social media site formerly known as Twitter. “As long as the Federal Reserve continues to treat US issues [SIC] paper as AAA rated credit so will financial market participants.”

As Yellen said in her statement: “Fitch’s decision does not change what Americans, investors, and people all around the world already know: that Treasury securities remain the world’s preeminent safe and liquid asset, and that the American economy is fundamentally strong.”

Job Openings Drop to 2-Year Low as Labor Market Cools

The number of job openings in the U.S. economy edged lower to 9.58 million in June, dropping by 34,000 from a downwardly revised 9.61 million in May, the U.S. Bureau of Labor Statistics announced Tuesday. It’s the smallest number of job openings recorded in the monthly report since April 2021, and a significant decline from the peak of 12 million in March 2022.

Layoffs in June moved slightly lower, as well, falling to 1.53 million from 1.55 million in May. The number of quits also dropped, falling by 295,000 to 3.8 million.

The latest data provide more evidence that the labor market continues to cool, a positive sign for Federal Reserve policymakers as they seek to control inflation by slowing the economy.

“This is definitely heading in the Goldilocks direction,” Rachel Sederberg, senior economist at labor analytics firm Lightcast, told CNBC. “We still have a long way to go, and we still have a very high number of openings, especially as compared to where we were pre-pandemic. But we’re heading in the right direction and we’re doing so in a calm manner, which is what we want to see.”

Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets, said the labor market remains healthy even as it cools. “The pattern is pretty clear so far this year that what we’re seeing is incremental slowing rather than a dramatic collapse in the labor market,” he said, per The Wall Street Journal.

One closely watched measure of the strength of the labor market remained well above its historical norm, with the ratio of job openings to unemployed workers little changed at 1.6. Before the pandemic scrambled the job market, that ratio was typically closer to 1.2.

“The data on layoffs show just how resilient employer demand for workers remains,” Nick Bunker, the head of economic research at Indeed Hiring Lab, said, per Bloomberg. “Layoff data, a loud emergency siren during economic downturns, are instead signaling a muted ‘all’s well’ for current employees.”

Number of the Day: 12.1%

Covid-19 hospitalizations in the United States rose by 12.1% in the week through July 22, according to new data from the Centers for Disease Control and Prevention. The increase is the largest since last winter and follows a rise of more than 10% the previous week. More than 8,000 hospital admissions of patients with Covid were reported from July 16 to July 22, up from 7,165 the prior week.

“While indicators of the virus are now clearly trending up nationwide, hospitalizations for now remain far below the levels recorded at this time last year,” CBS News notes. “Previous summer waves also saw steeper increases compared to what has been seen so far this year. The U.S. is averaging 1,729 more admissions per week compared to a month prior.”

Deaths due to Covid have not risen along with hospital admissions.

The Hill adds: “Federal health authorities are currently preparing for a fall vaccine campaign this year, the first that will mimic a normal flu shot campaign. Both Moderna and Pfizer have filed for FDA authorization of their respective shots updated to protect against the XBB.1.5 Omicron subvariant.”

Send your feedback to yrosenberg@thefiscaltimes.com. And please encourage your friends to sign up here for their own copy of this newsletter.

Fiscal News Roundup

Views and Analysis