WASHINGTON (Reuters)-the terrifying prospect of a Us debt default has left a cloud over businesses already shaken by the lukewarm performance of the economy and probably left them reluctant to ramp up hiring in July.
A heated political battle over how to increase the nation's debt ceiling has helped to make the prospect of once remote a downgrade of the credit rating of AAA United States a strong possibility. Worse still, investors are grappling with the unthinkable: a outright default on the debt of the Government of the United States.
The fight over the debt, which started with a refusal by some Republicans to raise the debt limit largely procedural without sharp cuts in public spending, it comes with the American economy already struggling to stay above water.
Data on gross domestic product in the second quarter released Friday, showed the largest economy in the world, expanded into just an annual rate of 1.3 per cent in April-June period. More worryingly, revisions to the first quarter to an annualized GDP dropped 0.4 percent pace-dangerously close to a contraction.
The figures prompted some analysts to wonder whether the market forecasts for a gain of unspectacular 90,000 jobs in the month of July may be too optimistic, following readings really sad for may and June. The jobs report is due on Friday.
"Certainly, my outlook tempera resets expectations," said Jason Ware, senior research analyst at Albion Financial Group in Salt Lake City. "If we're going to have any type of material uptick in private sector employment, we're going to be growing faster than 1.5 percent."
The furor over the debt crisis of the United States has temporarily diverted attention from the problems of Europe, which continue to simmer though. Moody's Investors Service's said on Friday that he had placed Spain's credit rating on review for a possible downgrade, citing financial pressure and a precedent set by the eurozone's debt for Greece.
That deal was supposed to rescue to calm fears of contagion, but does not appear to have done the trick. Borrowing for Italy, for example, soared in the latest bond auction.
Austerity measures seem to be taking a toll on many of the economies that were due to help, and a report on the euro-zone unemployment should show a steady unemployment rate of 9.9% for Monetary Union.
DAY AND THE R-WORD
Still, investors will continue to focus their attention on the most immediate risk and potentially catastrophic-a non-resolution of the U.S. debt debacle which leads to a crippling Government shutdown or even a debt default.
Most investors say that the latter scenario is highly unlikely, given that the Government should have enough revenue to continue to make bond payments for some time, particularly if it gives priority to bondholders as expected.
But this does not mean they are not increasing the risk of recession.
"We still think that the Federal Government will be able to avoid a default, but probably still will lose its AAA credit rating," said Julian Jessop, Economist at capital Economics. "Default could be averted even at the cost of a shutdown of non-essential government services that could tip the US economy into recession."
A tense calm over the stalemate of the debt has permeated the Treasury bond market of the United States, which have continued to rally in the last week, pushing yields 2.80% at 10 years, their lowest level since November.
Before the American occupation Friday, economists will eye two other key indicators: the Institute for Supply Management survey of factory employment report and the ADP, which is used as a rough guide to the Government's broadest gauge.
The ISM index is seen easing slightly, from 55.3 to 54.9, according to a survey by Reuters. About ADP, economists are looking for a gain of approximately 100,000 new private sector jobs-in tune with their predictions of total payrolls.
Officials at the Federal Reserve of the United States have continued to indicate a reluctance to take any new high program for monetary easing. But if the labour market into another rut, the pressure for renewed action could assemble. The Fed next meets to set the policy on 9 August.
(Reporting by Pedro Nicolaci da Costa; Editing by Dan Grebler)
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