Every time the United States reaches its debt limit, we read that it is important to reach an agreement to lift it. The narrative is that the debt ceiling must be raised, or the US economy will suffer a severe contraction. There is even an episode of a TV series, “Designated Survivor”, where the character played by Kiefer Sutherland places lifting the debt ceiling as the priority to get the U.S. economy on track. The debt ceiling is viewed as an evil and anachronistic burden on growth. It is not.
Analysts all over the world consider the debt ceiling a non-event because Congress always agrees to increase it. As such, markets do not even care. Congress has raised the debt ceiling on time on over eighty occasions since 1960, according to S&P Global. The rating agency points out that Congress has passed legislation to raise or suspend the debt ceiling seven times in the last twelve years (in 2011, 2013, 2017, 2018, 2019, and twice in 2021).
Markets have recovered massively in January, boosted by lower inflation and optimistic estimates of growth. The Chinese recovery is a key factor for this optimism, as well as the relief in European sentiment as the euro area may escape recession. These are factors that may prove to be a mirage for markets. All these news may reduce the risk of recession, but not the reality of stagnation.
Lifting Europe from deep recession to stagflation because of a mild winter is not a bullish signal. Furthermore, the Chinese reopening certainly helps the insipid global growth outlook, but it may also perpetuate elevated inflation. We cannot forget that the widely cheered inflation figure of November and December comes from weaker global demand for commodities, and the Chinese reopening means a huge boost to oil, coal, natural gas and copper demand in a moment where inventories remain below the five-year average.
The latest jobs report in the United States shows strengths and weaknesses. Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate fell to 3.5 percent. However, the United States job market continues to show negative real wage growth, the employment-to-population ratio is 60.1 percent, and the force participation rate is 62.3 percent. According to the BLS, both measures have shown little net change since early 2022 and each remain 1.0 percentage point below their values in February 2020.
The United States jobs figures are constantly dissected by analysts and there is a healthy criticism in independent research which certainly helps enormously when it comes to understanding the health of the labour market. However, in the European Union things are much worse.