The U.S. economy appears to be gaining strength, but that won’t necessarily prevent another bitter showdown over raising the debt limit this year, according to Treasury Secretary Timothy Geithner.
"I think even with agreement and prospect on the payroll tax, we still do not expect [to hit] the debt limit until quite late in the year, significantly after the end of the fiscal year, but before the end of the calendar year," Geithner said in testimony before the Senate Budget Committee on Thursday.
The fiscal year ends on Sept. 30. But whether the debt limit, which is now $16.4 trillion, is reached before the Nov. 6 election – setting up a particularly nasty fight along party lines – or after depends on just how well the economy does this year.
It’s off to a good start. The unemployment rate fell much faster than expected over the last two months and is now down to 8.3 percent. The Conference Board’s leading indicators, released on Friday, gave further evidence of a recovery on firmer footing.
But economists remind that the same thing happened last year, and the year before.
“The recent improvement in the incoming economic data… has raised hopes that the US economy could shrug off the crisis in the euro-zone and finally enjoy a more vigorous self-sustaining recovery,” analysts at Capital Economics wrote on Thursday. “But the U.S. economy has already been at this point twice before since the recession began, in early 2010 and then early 2011, only for growth to fall back sharply.”
Economic forecasters tick off now-familiar election-year headwinds: the European sovereign debt crisis, oil prices, the threat of another natural disaster disrupting global supply chains, and congressional gridlock.
That gridlock could be particularly damaging in a pre-election fight over the debt limit. When Congress debated raising the debt ceiling last summer – and threatened to default – the Dow fell 635 points in a single August day after Standard & Poor’s credit ratings agency slashed the United States’ top AAA rating. Consumer sentiment fell from 63.7 in July to 55.7 in August, according to the Thomson Reuters/University of Michigan measurement. While both have recovered, economists say they slowed progress towards restoring the country's economic health. Another round of debt fighting could do just the same, further pushing off the day when the country's economy is no longer frail.
There is, however, another way a fight could be avoided: if the debt limit were to be reached before the 2012 elections, the Treasury Department would be able to invoke extraordinary measures to extend borrowing authority beyond the next election, a Treasury official said.
CORRECTION: An earlier version of this story cited a Washington Post story that incorrectly identified the committee before which Geithner spoke. He delivered testimony before the Senate Budget Committee.
Niraj Chokshi contributed contributed to this article.