Double Dip Recession will be happening in US

It has been three decades since the United States suffered a recession that followed on the heels of the previous one. But it could be happening again. The unrelenting negative economic news of the past two weeks has painted a picture of a US economy that fell further and recovered less than we had thought.

When what may eventually be known as Great Recession I hit the country, there was general political agreement that it was incumbent on the government to fight back by stimulating the economy. It did, and the recession ended.

Debt ceiling fiasco risks double-dip recession

Economists say the debt ceiling debate has already damaged the U.S. economy, and many worry that a deadlock could send the country hurtling into a double-dip recession.

"Growing uncertainty about the ultimate outcome inevitably has some negative effect on business capital investment and hiring as the August 2 deadline approaches," said David Crowe of the National Association of Home Builders.

So far, the damage has been fairly limited, with most economists surveyed by CNNMoney saying the debate has reduced the nation's gross domestic product by only a few tenths of a percentage point, at most, to date.

And economists generally aren't too worried about the economic impact of the U.S. briefly breaking past the Aug. 2 deadline.

"If a deal appears imminent, there will not be any impact on GDP," said Bill Watkins, executive director of the Center for Economic Research and Forecasting.

But the impact could be substantial if a prolonged battle prevents the government from sending out millions of checks owed to Social Security beneficiaries, federal employees, active-duty soldiers and other Americans dependent on government funds.

Economy still stuck in the mud

If the debt ceiling isn't raised, the federal government won't be able to pay 44% of its bills in August, worth an estimated $134 billion, according to a Bipartisan Policy Center analysis. That's the rough equivalent of cutting annual spending by $1.6 trillion -- enough to have a major effect on the economy.

But just how major?

One third of economists surveyed said a new recession is possible if there's a prolonged deadlock. And the threat is even greater because the economy is still healing from the last recession.

"It could precipitate a double-dip given that the economy is weak," said Watkins.

Some compared it to the financial meltdown in the fall of 2008 that turned a typical economic downturn into the Great Recession.

"If a default is allowed to occur, this would be the equivalent of self inflicting a financial crisis that is larger and more damaging than the one from which the economy is still struggling to recover," said Sean Snaith, professor of economics at the University of Central Florida.

Economists disagree on just how long past the deadline negotiators could go before triggering a recession. David Wyss, an economist at Brown University, said a couple of weeks of deadlock might not cause too much damage. But "if the problem extends, it probably means a return to recession with a negative third and fourth quarter."

But the majority of the 18 economists surveyed believe the economy will keep growing, albeit more slowly, even with a continued debt ceiling impasse.

A prolonged deadlock would shave a few points off of GDP for the rest of the year, but stop short of an actual recession, said David Nice of Mesirow Financial.

He doesn't think debt debate will drag on for too long, but if it does, he would cut the firm's forecast for economic growth roughly in half in the third quarter.

Debt ceiling: Moody's puts U.S. on notice

The public pressure on lawmakers to raise the debt ceiling was ratcheted up Wednesday when a major rating agency said it would put the sterling bond rating of the United States on review for possible downgrade.

Moody's Investors Services said it had initiated the review because of "the rising possibility" that Congress will fail to raise the debt ceiling by Aug. 2 -- something that could lead to a U.S. default on its debt.

If the debt ceiling isn't raised by then, the Treasury Department says it will no longer be able to pay all the country's bills in full and on time without being allowed to borrow new money. (Read: Debt ceiling FAQ)

"Moody's considers the probability of a default on interest payments to be low but no longer to be de minimis," Moody's said in a statement.

The United States enjoys its AAA rating in part for having always stood behind its debt and paid its bills on time. As a result, U.S. Treasury bonds are considered the world's safe-haven investment.

The Treasury Department issued an immediate response Wednesday.

"Moody's assessment is a timely reminder of the need for Congress to move quickly to avoid defaulting on the country's obligations and agree upon a substantial deficit reduction package," Treasury official Jeffrey A. Goldstein said in a statement.
Debt ceiling: Chaos if Congress blows it

In the still unlikely event the United States would default on any of its interest payments to bondholders, Moody's said it expected the default to be short-lived and the loss to bondholders "minimal or non-existent."

But, the agency added, a default "would fundamentally alter Moody's assessment of the timeliness of future payments." Translation: The United States would be downgraded to AA status.

Beyond the debt ceiling: Even if lawmakers raise the debt ceiling in time, Moody's also made clear that it is expecting progress on the long-term debt.

The agency said it would likely change its outlook on the AAA rating to "negative" from "stable" absent a "substantial and credible" debt-reduction deal.

Moody's had alerted investors in early June that it was considering putting the U.S. rating under review unless it saw forward movement in the debt talks by mid-July. It cited as a concern the "heightened polarization" in the debate.

Since then, negotiations led by Vice President Biden to find a compromise broke down and the prospects for a "grand bargain" have been called into question.

Market reaction: Just how the bond market -- i.e., the investors around the world who lend to the federal government -- will respond to Moody's action is not clear yet.

Bond traders may take note but not blink since the agency already signaled its intention -- "so no surprise factor," said Steve Van Order, a fixed income strategist at Calvert Investments.

And Moody's isn't the ultimate arbiter.

"The bond market will follow its own judgment of how Washington is approaching deficit reduction, not the decisions of the rating agencies," said Jim Vogel, head of interest rate strategies at of FTN Financial.

But, Vogel noted, "Moody's action will focus the market's attention on the debt ceiling more than it has been in recent days. Rating agency actions also may provide a rationale for policy makers to alter their voting stance as deadlines loom."
Bernanke: Default would cause 'major crisis'

Moody's isn't the first ratings agency to announce a negative action.

In April, Standard & Poor's revised its outlook on the country's AAA rating to negative from stable.

S&P's reason: Relative to its peers, the United States has "very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us."

Fitch Ratings, meanwhile, said in early June that if lawmakers fail to raise the debt ceiling by Aug. 2, it would put the country on "ratings watch negative," meaning there is a "heightened probability" of a rating change.

Tim Geithner considering leaving White House

Tim Geithner is considering leaving his post as Secretary of the Treasury after a deal to raise the debt ceiling is reached, a source familiar with the discussion told CNN Thursday.

Geithner is the lone remaining member of President Obama's original economic team.

Asked by former President Bill Clinton on Thursday at a Clinton Global Initiative event about his future plans, Geithner said he would be doing his job "for the foreseeable future."

A Treasury official said that Geithner will not make any decisions while he's focused on negotiations over the debt limit and deficit reduction.

Another source familiar with the discussions between Geithner and the White House said it could be a while before Geithner's ultimate departure. "You have to have somebody lined up for the job -- you can't just leave," this source said. "And there's a relative scarcity of people who would fit the bill."

Obama nominated Geithner to be the 75th Secretary of the Treasury, and the Senate confirmed him on Jan. 26, 2009.

Geithner went on to spearhead the administration's response to the financial crisis that threatened to unravel economic growth around the globe.

That response included a bailout of the U.S. auto industry, a massive economic stimulus package and a landmark Wall Street reform effort. So-called stress tests of the nation's largest banks in early 2009 also helped shore up confidence in financial markets.

Geithner's first days in the administration were not without stumbles, as markets met his efforts to support the banking industry with skepticism, and giant bonuses paid to executives at bailed-out insurer AIG sparked public outrage.

But Geithner emerged as one of the strongest voices on Obama's economic team.

"I think he has done a great job in a backbreaking position," Clinton said Thursday.

Another member of Obama's original team, Council of Economic Advisers chairman Austan Goolsbee, has said he will leave the administration in August to return to the University of Chicago.

That leaves the administration with two holes to fill in the months leading into the 2012 presidential race, where the economy is expected to be issue No. 1.

National Economic Council director Lawrence Summers, and Office of Management director Peter Orszag left the administration last year. Christina Romer, the original chair of the Council of Economic Advisers, has also left.

Before joining the administration, Geithner held the top post at the Federal Reserve Bank of New York, where he played a crucial advisory role during the financial crisis of 2008.

Before joining the Fed, he held posts at the IMF and worked in the Clinton administration Treasury Department.

New unemployment claims barely improve

The number of Americans filing for first-time unemployment benefits slipped only slightly last week, falling short of economists' expectations for a bigger drop.

There were 428,000 initial jobless claims filed in the week ended June 25 -- 1,000 fewer than the week before, the Labor Department said.

It marked the 12th straight week initial claims have stayed above the 400,000 mark -- and was worse than the 420,000 claims economists surveyed by Briefing.com had expected.

"Another week, another disappointing U.S. initial claims report," Jennifer Lee, senior economist with BMO Capital Markets said in a note to investors.

Lee pointed out that claims have been hovering at a level that offers little confidence that the job market's recovery picked up substantially in June. Slower auto manufacturing following Japan's earthquake could still be taking its toll, she said, and will hopefully let up later this summer.

The four-week moving average of initial claims, calculated to smooth out volatility, increased to 426,750, up 500 claims from the week before.

Fewer jobs for unemployed workers

Continuing claims -- which include people filing for the second week of benefits or more -- fell to 3,702,000 in the week ended June 18 -- also falling short of economists' forecasts for 3,700,000 ongoing claims.

California, New Jersey and Florida saw claims rise the most in the week ending June 18, the most recent data available.

Meanwhile, Ohio saw the biggest drop in unemployment claims, with 2,769 fewer people filing claims in that state. Illinois and New York followed, each with drops of 2,000 or more.

The Labor Department will release its closely watched monthly jobs report next Friday, detailing how many jobs the U.S. economy created in June.

May's report showed the economy added a disappointing 54,000 jobs that month -- far too low to bring down the unemployment rate.

Debt ceiling delay would be 'chaotic'

Here's what Americans can look forward to if lawmakers fail to raise the debt ceiling in time: Treasury would not be able to pay between 40% and 45% of the 80 million payments it needs to make every month.

That's the estimate from a new analysis by the Bipartisan Policy Center, a think tank in Washington founded by four former Democratic and Republican Senate majority leaders.

A delay in raising the debt ceiling could affect Social Security checks, food stamps, federal worker and military paychecks, government contractor bills and payments to Medicare and Medicaid providers.

"Handling all payments for important and popular programs (e.g., Social Security, Medicare, Medicaid, defense, active duty pay) will quickly become impossible," the report's authors noted.

Treasury Secretary Tim Geithner has said that by Aug. 2 he will no longer have enough money on hand every day to pay all the government's bills in full and on time. The government reached the legal borrowing limit on May 16 and has been taking "extraordinary measures" since to keep the country out of default.

To ensure it has enough cash on hand to make a $29 billion interest payment to investors on Aug. 15 -- among other payments -- the government would have to defer 44% of federal spending, and that would affect the broader economy, according to the BPC study.

Treasury is expected to update its estimate of the so-called "drop dead date" at the start of July, but no one expects the date to change much.

It's impossible for anyone to know exactly how much the government will take in and have to pay out on any given day in August. The BPC based its estimates on the revenue and outlays reported by Treasury from August 2009 and August 2010.

Bond experts to Congress: Don't mess it up

It's also impossible to say yet just how the government would prioritize payments. It's fair to assume, however, that picking who gets paid and who gets put off will be a mess technically and socially because it's never been done before.

"The reality would be chaotic," the report states.

The going assumption is that Geithner will do everything he canto pay bond investors, so the country doesn't go into a formal default.

"The Treasury Secretary will squirrel away money like -- well, a squirrel. He may have to delay some payments starting days or weeks early to prepare for big important payments later," said Joe Minarik, who served as the chief economist of the White House Budget Office in the Clinton administration.

And as the BPC study noted, the whole event could cause a public uproar and market unrest, the outcomes of which is anyone's gues.

California Budger with Deep Cuts

California lawmakers approved a $86 billion budget late Tuesday that imposes deep spending cuts but does not extend tax hikes.

The budget is a disappointment for Governor Jerry Brown, a Democrat who spent months trying to convince Republican legislators to put an extension of personal income and sales tax increases before the voters.

Unable to do so, Brown and Democratic legislative leaders cobbled together a plan that calls for a total of $14.6 billion in cuts.

"Putting our state on a sound and sustainable fiscal footing still requires much work, but we have now taken a huge step forward," Brown said in a statement.

Much of the bloodletting was agreed to in March, but this week's deal would add at least $2.5 billion in additional reductions.

Overall the Department of Health and Human Services would be slashed by $5 billion, while the Department of Corrections and Rehabilitation would see a cut of $1 billion. The state's two university systems would each lose $650 million in funding.

The budget hinges on the state bringing in $4 billion in more in tax revenues in the coming year than was initially expected. The improving economy has pushed the state's tax collections billions of dollars above estimates in recent months. Brown expects the windfall to continue into fiscal 2012, which starts Friday.

If tax revenue comes in lower than expected, the budget also would impose an additional $2.6 billion in cuts to higher education, corrections and in-home support services for the elderly and disabled.

The proposal would slash billions in spending for children, the sick, and the elderly, said Senate President pro Tem Darrell Steinberg. And it would hurt the state's economy, he said.

"This budget is the most austere fiscal blueprint California has seen in a generation," Steinberg said.

Since the budget does not call for tax increases, it requires only a majority of the Democratic-led legislature to approve it. However, Governor Brown and his fellow Democrats said they plan to put a tax measure on the ballot in November 2012 through a voter initiative -- bypassing the requirement for Republican consent.

Though they fended off Brown's tax extensions, Republicans immediately attacked the proposal, saying California needs a budget that will revitalize the economy and create jobs.

"This latest budget is based on the hope that $4 billion in new revenues will miraculously materialize, but does absolutely nothing to change government as usual," said Senate Republican Leader Bob Dutton.

The proposal is a major shift for Brown, who has said for months that the state's $26 billion budget's gap should be addressed with a mix of spending cuts and tax extensions. He also was determined to fulfill his pledge to put the extension of personal income and sales taxes before the voters.

However, he could not convince four Republicans to join him so he could get the measure on the ballot. A budget containing a tax hike needs the support of two-thirds of lawmakers.

Republicans have refused to go along unless the budget also contained a spending cap, as well as pension and regulatory reform.

The latest proposal was put together less than two weeks after Brown vetoed a budget approved by the legislature, saying it was chock full of gimmicks and contained legally questionable maneuvers.

California lawmakers lose pay until they pass balanced budget

Lawmakers had raced to pass a spending plan by June 15 to meet a voter-imposed deadline that required the legislature to pass a balanced budget or forfeit their pay.

However, state controller John Chiang determined that the budget was actually unbalanced. So lawmakers, who earn $95,291 a year and $142 per diem for each day they are in session, have gone without pay since mid-month.