Is The Debt Ceiling Debate 2023 Slowing Down Car Sales?
The federal government’s borrowing limit is once again being debated in Congress to settle past bills. The ongoing debt ceiling debate may have an impact on new car shopping until it is resolved. The outcome could range from a temporary slowdown to a prolonged recession.
According to Jonathan Smoke, the chief economist of Cox Automotive, the United States government has minimal involvement in new car loans. However, during the previous debt ceiling crisis in 2011, when Congress and the president nearly reached a critical point, consumer confidence plummeted significantly and took several months to recover.
Cox Automotive, the parent company of Kelley Blue Book, explains that while new vehicle sales did experience a slowdown during the 2011 crisis, they did not suffer a dramatic decline. The crisis was ultimately resolved when Congress raised the debt limit.
What is the Debt Ceiling?
The U.S. government does not generate enough tax revenue to cover all of its expenses. To bridge the gap, it issues bonds as a form of debt. In 1917, Congress established a limit on how much the government can borrow by issuing new bonds. Since then, Congress has periodically raised this limit whenever the budget is unbalanced.
Raising the debt limit does not authorize new spending; it covers the spending that Congress has already approved in previous budgets. Congress frequently approves spending in a budget but later threatens not to issue bonds to finance it.
However, if Congress fails to raise the ceiling, the U.S. government could face difficulties in paying for various obligations, including social security benefits and maintaining government operations. Additionally, it would be unable to make interest payments on existing bonds.
As many governments worldwide rely on U.S. bonds, a default on payments could destabilize global economies and potentially trigger a global recession.
What is the Current Dispute About?
In this instance, Republicans in the House of Representatives have proposed a plan that would raise the debt limit but require spending cuts in return. On the other hand, the White House is advocating for a clean increase in the debt limit without any conditions, arguing that Congress has already spent the money in previous years.
Debates over the debt ceiling have become commonplace since the 1990s. Successive congresses and administrations have engaged in negotiations over potential defaults since President Bill Clinton’s first term, typically when Republicans have controlled at least one house of Congress while Democrats have held the presidency.
Are There Any Unusual Solutions?
Yes, whenever this issue resurfaces, things tend to take a peculiar turn. Some legal theories argue that the law establishing the debt limit is unconstitutional.
However, engaging in debt limit brinkmanship shakes confidence in financial markets. To test the theory, the White House would have to reach the debt ceiling, continue paying bills, and wait for someone to sue to halt the payments. Eventually, the Supreme Court would need to rule on whether the White House had the authority to do so. This waiting period could undermine global confidence, potentially resulting in consequences similar to default.
In the past, members of Congress have proposed other unconventional solutions. One proposal suggests that a quirk in the President’s authority over currency would allow them to order the U.S. Mint to produce a coin worth trillions of dollars and deposit it into the treasury, effectively resetting the government’s debts below the limit. However, such a solution would likely face legal challenges, the outcome of which remains uncertain.
What is the likely outcome of all this?
Jonathan Smoke, an economist, compares the situation to being a weatherman and states, “The upcoming months appear uncertain, with a high probability of significant challenges.”
If Congress fails to raise the debt limit on time, Smoke believes it would likely trigger a recession as negative effects ripple through the U.S. and global financial markets. This recession would result in a decrease in vehicle demand, further credit tightening, and possibly cause manufacturers to reduce production.
However, past debt limit debates have never extended for such a long duration. Smoke says, “Based on experience, the most probable scenario is a last-minute agreement prompted by significant declines in financial markets.”
How does this relate to my car shopping plans?
New car prices have recently been declining, falling below the sticker price for the first time in nearly two years. However, the Federal Reserve’s repeated actions to increase interest rates have created a tight credit market, making it challenging for many shoppers to participate despite the lower prices.
As the possibility of default approaches, the debt limit brinksmanship could disrupt the stock market, impacting luxury vehicle sales. Any slowdown in the market would dampen the positive signs seen in new-vehicle sales, which have largely been driven by improving inventory and pent-up demand.
This situation could benefit those who can afford to shop for cars at the moment since they would have fewer competitors in the market. However, few Americans possess the financial means to purchase cars, especially when a recession may be on the horizon.
Due to low confidence, more buyers are likely to stay away until the standoff is resolved. Even if the debate is resolved, Smoke suggests that analysts are monitoring other factors that could disrupt the car market. For example, negotiations between automakers and the United Auto Workers union are expected to intensify in the fall, potentially leading to strike threats and further chaos for car shoppers.