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The US may hit its crucial debt-limit deadline sooner than anticipated, according to Goldman Sachs, putting the country on the fast track to a harmful default on its financial obligations.
While data are very preliminary, "weak" tax collections so far in April point to an increased probability that the debt-limit deadline will be reached in the first half of June, Jan Hatzius, Goldman's chief economist and head of global investment research, said in a note published Tuesday. His economics team has been projecting the US Treasury could run without an increase in the debt limit until early August.
The US reached its $31.4 trillion debt ceiling in January, and it's up to a politically divided Congress to increase that limit to allow the government to pay bills for funding Social Security checks and benefits for veterans, among other obligations.
The June deadline projection comes as Washington lawmakers and financial market investors brace for a contentious standoff between Democrats and Republicans. The Biden administration is looking for clean debt-limit raise, with no addendums or further cuts placed on a debt-ceiling package.
But Republicans are reportedly preparing a proposal that would ban student-loan forgiveness and impose stricter work requirements on food-stamp recipients.
"A June deadline would raise the possibility of a short-term extension. We are generally skeptical of reports that congressional Republicans might pass a short-term debt limit extension, as voting to raise the debt limit twice is harder than voting once," wrote Hatzius.
"That said, if the Treasury announces in May that the deadline is only a few weeks away, there would be little time to negotiate a deal and a short-term extension could provide a way out," he wrote. "While not our base case, a June deadline would make a short-term extension a plausible scenario."
There is a slightly greater chance that the debt-limit deadline is in late July, but if tax receipts continue to undershoot, that could change to the base case to early June, Goldman said.
House Speaker Kevin McCarthy said at the New York Stock Exchange on Monday a debt ceiling vote will come in weeks. Biden faces a "bumble into the first default" by the US if he doesn't negotiate raising the debt ceiling with Republicans, he said.
The nonpartisan Congressional Budget Office estimates the Treasury will exhaust current "extraordinary measures" between July and September.
"Analysts are reminded of the painful process in 2011 that coincided with the first downgrade to U.S. debt, and the S&P 500 saw a 19% drawdown in less than three months," Mark Hackett, chief of investment research at Nationwide, wrote in a note Monday.
A short debt default could lead to 1 million Americans suddenly losing jobs and economy to undergo a mild recession, according to Moody's Analytics.
Treasury Secretary Janet Yellen told Reuters in February she wants to find ways to reduce the deficit alongside Republicans, "but it can't be a condition or precondition for raising the debt ceiling."
