by Bill McBride on 10/04/2013 08:42:00 PM

Some thoughts from Alec Phillips at Goldman Sachs: Will the Federal Shutdown End with a Debt Ceiling Increase?

In our view, the most likely outcome of the current fiscal dispute is an agreement that combines an increase in the debt limit and a "continuing resolution" that reopens the federal government. We would expect this to pass no earlier than the end of next week (i.e., October 11-12) and more likely sometime around the Treasury's projected deadline of October 17.

Other outcomes are possible, but we believe they have lower probabilities. It is possible that political pressure to end the shutdown could build, but polling thus far does not indicate this has happened yet. It is also possible that if the effort to resolve the two issues together fails, the shutdown could remain unresolved even after the debt limit has been increased. This is a possibility, but we see it as less likely than a combined continuing resolution and debt limit increase.

The intense public focus on the shutdown may have actually raised the possibility of a "clean" debt limit increase. While the situation could go a number of ways, it still appears that the risk of a failure to raise the debt limit is low and that the shutdown has not had a negative effect on the prospects for increasing it.

And Phillips also mentions:

Congress is scheduled to go on recess the week of October 13, but this would presumably have to be cancelled if the debt limit had not yet been addressed. In the past, seemingly intractable political disputes have often been resolved around the start of planned congressional recesses.
emphasis added

Can't miss recess ...

by Bill McBride on 10/04/2013 06:09:00 PM

From Ethan S. Harris at Merrill Lynch: Macro viewpoint: Breaking bad

We have changed our call: our base case is now for either a two-week shutdown or for more than one shutdown. With weak growth momentum and more damage from Washington, we are lowering 3Q growth to 1.7% and 4Q to 2.0%. We are also pushing Fed tapering to Jan 2014.

There has been no change in rhetoric despite public opinion polls that strongly oppose the shutdown and that are particularly critical of Republicans. ... Most respondents also disagree with the strategy of shutting down the government over the health care law: basically by 3-to-1 in polls by Quinnipiac University, CBS News and CNBC.

The Affordable Care Act (ACA) continues to be in the center of the battle. In our view, this is an issue where there is no compromise. We believe it would take truly extraordinary circumstances for the President to agree to undercut his proudest legislative achievement; even a small concession would likely lead to further demands at each budget deadline.
...
Our new baseline assumes a two week shutdown, but no violation of the debt ceiling. ... We also continue to fear a much worse outcome. Recall that the failure to pass a continuing resolution cuts government spending by roughly one percent of GDP, while failure to raise the debt ceiling requires balancing the budget – a 4% of GDP cut in spending. ... Failure to raise the debt ceiling by the end of October would be catastrophic, in our view.
emphasis added

It is time for the House to end the shutdown.

by Bill McBride on 10/04/2013 02:38:00 PM

From mortgage banker Lou Barnes:

The shutdown itself can't be quantified. ...

We are still taking applications, locking rates, processing our little hearts out, and closing. Our principal problem: in the post-Bubble spasm authorities decided that ALL borrowers should produce two years' tax returns (not just the few self-employed, or owners of rental property, or those needing investment income to qualify). And authorities decided that neither the borrowers nor their CPAs could be trusted to give us true copies, so we must pull transcripts from the IRS (the dreaded 4506T).

The IRS is shut. When it re-opens it will have to process a backlog growing by the hour. Are the authorities helping by waiving the transcript, or granting good faith safe harbor? NooOOOooo. Many lenders -- to their great credit -- seem willing to defer the risk to post-closing. However, home sales and closings will suffer soon, if only by expired rate locks.

Time to end the shutdown.

by Bill McBride on 10/04/2013 11:57:00 AM

From the Association of American Railroads (AAR): AAR Reports Increased Intermodal, Carload Traffic for September and the Week

The Association of American Railroads (AAR) today reported increased total U.S. rail traffic for the month of September 2013, with intermodal and carload volume increasing overall compared with September 2012. Intermodal traffic in September totaled 1,027,522 containers and trailers, up 4.4 percent (43,055 units) compared with September 2012. The weekly average of 256,881 intermodal units in September was the second-highest monthly average of any month in history. The three highest-volume intermodal weeks in history for U.S. railroads occurred last month; only the Labor Day holiday prevented it from being the highest-volume intermodal month in history.
...
“Those who follow the rail industry know that carloads of grain and coal can rise or fall by substantial amounts for reasons that have little or nothing to do with the state of the economy,” said AAR Senior Vice President John T. Gray. “Not so with most other rail traffic categories, however. The fact that rail carloads excluding coal and grain were up 4.9 percent in September — the biggest year-over-year monthly gain since last December — is a hopeful sign.”
emphasis added

Click on graph for larger image.

This graph from the Rail Time Indicators report shows U.S. average weekly rail carloads (NSA).  Green is 2013.

U.S. rail carloads totaled 1,159,784 in September 2013, an average of 289,946 per week and up 0.7% (7,595 carloads) over September 2012. A 0.7% increase isn’t much, but it’s the first time since the end of 2011 that there’ve been two straight months with year-over-year monthly increases in total carloads. With the exception of January, carloads each month in 2013 have tracked 2012 extremely closely....

Carload gains in September 2013 were led by crushed stone, gravel, and sand, which saw carloads up 8,253, or 10.0%, over September 2012 ... The commodity with the largest year-over-year carload decline in September 2013 was coal, which saw carloads fall 12,894 (2.7%) from September 2012.

Note that lumber was up 9.8% from a year ago.

Graphs and excerpts reprinted with permission.

The second graph is for intermodal traffic (using intermodal or shipping containers):

Intermodal traffic is on track for a record year in 2013.

U.S. railroads originated 1,027,522 intermodal containers and trailers in September 2013, an average of 256,881 per week. That’s up 4.4% (43,055 units) over September 2012 and the second-highest monthly average of any month in history. If not for the Labor Day holiday, September would have been the highest-volume intermodal month in history. The fourth week of September had the highest intermodal volume (269,853 units) of any week in history; the second week of September 2013 had the second-highest intermodal volume (265,873 units) in history; and the third week of September had the third-highest intermodal volume (262,897) in history.

Rail traffic and the economy usually grow together, so this is a good sign for the overall economy (at least through September).

by Bill McBride on 10/04/2013 11:25:00 AM

From Treasury Secretary Jack Lew: U.S. failure to pay bills hurts everyone

An increase in the debt limit simply allows us to pay our bills. Without a debt limit increase, our government will — in a matter of days — not have the resources it needs to make good on its commitments.

Only Congress has the power to lift the debt limit. That means only Congress can clear the way for our government to meet all of its financial obligations.

The United States has met all its financial obligations for more than 200 years. We are a nation that keeps our word. We are a nation that stands behind our full faith and credit.

Some claim that the United States does not need to meet every one of its commitments. They argue that the government could pay certain bills and let others go unpaid without consequences.

The United States cannot be put in a position of having to choose which commitments it should meet. How could we possibly decide among supporting our veterans, maintaining food assistance for children in need, or sending Medicare payments to hospitals?

CR Note: I think Congress will pay the bills (i.e. raise the "debt ceiling"). As I've noted, the "debt ceiling" sounds virtuous, but it isn't. It is actually just a question of paying the bills. As Republican Senator Mitch McConnell said in 2011, if the debt ceiling isn't raised the "Republican brand" would become "toxic" and synonymous with fiscal irresponsibility. If Congress stopped paying the bills - for the first time in 237 years (except some minor glitches) - people will remember when they vote. So it won't happen; Congress will pay the bills.