Experts: Arizona economy could hit hard if default is in our stars – Cronkite News

President Joe Biden greets Speaker of the House Kevin McCarthy ahead of his State of the Union address in February. The two men were unable to agree on a plan to raise the debt ceiling, bringing the country closer to defaulting on government commitments on June 1. ( Photo by Adam Schultz/White House)

WASHINGTON – If the US defaults on its debt, it wouldn’t be good news for anyone, but economists say it would be especially bad news for Arizona.

According to a Moody’s Analytics report that identified Arizona as one of the tourism-dependent states that would see rapid job losses, travel and tourism would likely be hit hard.

“Attractions like the Grand Canyon, Sedona, of course, the Phoenix area, which is especially big for business travel, I think all of these have a significant impact,” said Adam Kamins, senior director at Moody’s Analytics and one of the authors report.

This is just one of the scenarios economists argue that a short-term default — or “even a small loss in the event of a default” — could rock markets and impact housing, senior income, military spending, and more, all of Arizona’s important sectors of the economy.

Few believe the Biden administration will fail to reach an agreement with House Republicans to raise the debt ceiling by June 5. Treasury Secretary Janet Yellen called that day “X-date” after which the United States will not be able to pay its bills and will go into insolvency.

The problem is the national debt limit of $31 trillion – if it is not raised, the US will not be able to borrow more money to pay the bills it has already incurred. The limit has been raised many times in recent decades and is usually uncontroversial, but Republicans have said they will not approve the increase without a guarantee of cutting future federal spending.

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President Joe Biden initially refused to negotiate the debt limit. But the administration has relented in recent weeks, and negotiations have continued intermittently as date X approaches.

Both Biden and Speaker of the House Kevin McCarthy said default was not an option. Economists agree that a default is unlikely, saying it would be a “catastrophic economic situation”.

“The likelihood of default is greater than the likelihood of being hit by an asteroid,” said Dennis Hoffman, an economist at Arizona State University’s WP Carey School of Business. “We’ll probably have all these pretenses and come to an agreement and move on, as we’ve done countless times.”

Kamins and other Moody’s Analytics economists agree. They believe that there is an 85% chance that the United States will not go bankrupt and “everything will turn out okay overall.” However, they also consider that there is a 10% chance of a short infringement, lasting less than a week, and a 5% chance of a long-term infringement, lasting several weeks or more.

Kamins said the short-term breach will be felt immediately by federal employees and military contractors, and then by older Arizona residents who could lose their Social Security and Medicare checks if the situation goes unresolved. According to the Census Bureau, 18.3 percent Arizona’s population is 65 or older, compared to a national rate of 16.8% in 2020.

“I think what is particularly concerning in Arizona, given the large population of retirees, is the fact that the proportion of seniors is very high … compared to the rest of the country,” Kamins said. “So Social Security payments, Medicare payments may be held up until the debt ceiling is resolved.”

More damaging would be a prolonged breach affecting countries “subject to the ups and downs of the business cycle”. This includes countries whose economies are based on manufacturing, vehicles and tourism.

Analysts are expecting near-record crowds at Phoenix Sky Harbor International Airport this Memorial Day weekend. However, economists say tourism will take a hit if the US defaults on its debt payments next week, which would be bad news for tourism-dependent states like Arizona. (File photo by Kasey Brammell/Cronkite News)

From March 2023, free time and hotel industry it had 345,000 employees, an Arizona record. The Arizona Bureau of Tourism reported that more than 40 million visitors spent more than $20 billion in 2021.

Even if lawmakers reach a deal after a few weeks off, Kamins said there will be “enough negative momentum at this point to drive a deep recession” that could cost Arizona between 78,900 and 188,100 jobs.

“Arizona will be hit harder than most states, and it will take a long time to get out of this vicious circle,” he said.

Hoffman said Arizona has already seen the economic impact of reduced tourism during the COVID-19 pandemic. However, he said the breach will also affect other growing sectors in Arizona. He pointed to the recent commitment of Taiwan Semiconductor Manufacturing Co. to invest $40 billion in Arizona, saying it could be threatened by insolvency.

“There are a huge number of jobs associated with these potential private investments, which in turn depend on federal government support programs,” Hoffman wrote in an email.

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Hoffman also sees volatility in Arizona’s real estate sector, which he said is facing pressure from the recent collapse of Silicon Valley Bank and the Federal Reserve Board’s tightening of financing options for homebuyers.

“We are struggling with our real estate sector right now. It’s much worse today than a year ago,” Hoffman said.

In a phone call with reporters last week, Heather Boushey of the President’s Council of Economic Advisors said going over the debt limit will affect “anyone who wants to get a mortgage in any state.”

Kamins said analysts saw no urgent need from Washington to make a deal. This is partly because the financial markets have failed to react and partly because the expected influx of tax returns on June 15 could give a false sense of security.

Hoffman compared the current situation to the 1991 film Thelma and Louise.

“Unlike an asteroid, which is a random, unstoppable, unpredictable event, it … it would be a coordinated action by our Congress and administration together to drive this car into the Grand Canyon,” said Hoffman, “I think while they both are sitting in the front seat blaming each other for the action.”

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