"Debt Default Doomsday: How the Looming Crisis is Sending Shockwaves Through the US Economy"

 

As the potential for a US debt default crisis looms, Americans are becoming increasingly concerned. A recent survey by the University of Michigan revealed that the “debt crisis standoff” is now one of the factors contributing to a decline in consumer sentiment, which has hit its lowest level in six months. If a debt default does occur, the fallout could be even worse for consumers who are already feeling gloomy about the economy.

The longer a resolution to the debt ceiling crisis is unmet, the more it will start to weigh on consumer mindsets, according to Wells Fargo economists. Looking back to the debt ceiling impasse of 2011, consumer sentiment fell 18.5 points between May and August 2011 as the "X date" grew closer.

Treasury Secretary Janet Yellen has warned of the economic and financial catastrophe that a default on US obligations would produce. "Millions of Americans could lose their jobs. Household incomes would be reduced. American businesses would see credit markets deteriorate. And millions of American families that receive government payments would likely be left without the resources that they were promised,” she said.

The S&P 500 fell more than 17% during the debt ceiling crisis of 2011, highlighting the potential impact of the current situation on the stock market.

The uncertainty surrounding the debt ceiling crisis, coupled with sticky inflation and warnings of a consumer slowdown, make it one of many factors weighing on markets. Bank of America analysts expect the resolution to go down to the wire, which means the risk of higher rates, broad market volatility, and negative impacts on stocks in late May or early June.

Consumers’ expectations for inflation over the next year have dropped slightly to 4.5%, while expectations for long-term inflation have increased 0.2 percentage points to 3.2%, the highest level since 2011. As June 1 nears, the debt ceiling could become a leading driver not just for consumer sentiment but for stocks as well.

In conclusion, the potential for a US debt default crisis is causing increasing concern among Americans, with the standoff contributing to a decline in consumer sentiment. If policymakers fail to resolve the crisis, it could exacerbate the dire economic consequences of default. The longer a resolution is unmet, the more it will weigh on consumer mindsets, potentially leading to panic and negative impacts on the stock market.