The continuing slide in the US fiscal position, along with a lackluster economic performance, will likely impact its sovereign ratings in 2013, according to QNB group analysis. The US federal debt to GDP, fiscal deficit, and economic growth and outlook are factors that are impacting the ratings outlook. In a special comment earlier in September 2012, ratings agency Moody’s, mentioned the possibility of lowering the US government bond rating to Aa1 in 2013, from the current Aaa.
The ratio of US federal debt to GDP has increased from 40 percent in 2008 to 68 percent in 2011, and is estimated to reach 73 percent by year-end 2012, according to the US Congressional Budget Office (CBO). This will be the highest level since 1950. In absolute terms, under the CBO’s baseline scenario (including spending cuts), that would translate into $14.5 trillion of federal debt by 2022, from $11.3 trillion as at year-end 2012. In addition to federal debt, overall government debt includes around $4.5 trillion of securities held by federal trust funds and other government accounts.
Growing debt means that overall government debt topped $16 trillion (103 percent of GDP) in September 2012, nearly reaching the ceiling of $16.4 trillion, which was set in August 2011. In comparison, UK’s with a rating of Aaa has a government debt to GDP at about 86 percent.
With current estimates putting incremental government borrowing at over $100 billion a month, the debt limit is likely to be reached by year-end. The CBO estimates that the US government deficit will total $1.1 trillion (7.3 percent of GDP) in the current fiscal year, which ended on Sept. 30. This is the fourth consecutive fiscal deficit and shows no signs of improvement in the short-term. With US elections slated for Nov. 6, government efforts to reduce the deficit through spending cuts and tax increases, will most likely come into effect only in 2013 at the earliest.
Meanwhile, economic indicators show mixed signals, with signs of a weak recovery.
While US real GDP growth in the first quarter was estimated at 2.0 percent, real GDP estimates for the second quarter of 2012 were revised downward to 1.3 percent, from 1.7 percent. The deceleration in real GDP was owing to a slowdown in personal consumption and fixed investment.
Among the positive signals of economic activity, was the national purchasing managers index (PMI), a benchmark indicator of corporate activity. The PMI rebounded in September to 51.5. In August the PMI was at 49.6, slightly below the 50-point mark, which is viewed as the dividing point between expansion and contraction.
Another indicator is the conference board’s consumer confidence index, which increased in September to 70.3, from 61.3 in August. The index rebounded to levels not seen since February earlier this year, as consumers were more positive in their assessment of current conditions, mainly the job market, and much more optimistic about the outlook for the business environment, employment and their financial situation.
There has also been a recovery in the housing market, as low prices and interest rates have encouraged home buyers. The number of housing starts peaked in June 2012 at 754,000 — a level not seen since October 2008. Although housing starts contracted in July to 733,000, they recovered strongly in August, rising to 750,000.
Looking at the jobs data — unemployment edged down to 8.1 percent in August, with the job creation at 96,000 for the month, a level not sufficient to support economic growth. In the year up to August, job creation averaged 139,000 per month, compared to an average of 153,000 jobs created in 2011.
Overall, the economic recovery is yet to show some strong signs of momentum, while the outlook is equally weak. In such a situation, it is unlikely that government priorities will be fixed toward fiscal discipline, but rather directed more toward economic stimulus initiatives. This will require additional funding and further increase the fiscal deficit and debt levels. It is likely that spending cuts will be put in place; however, it will be at a gradual pace, putting pressure on the sovereign ratings, according to QNB Group.