The U.S. standard would be “catastrophic,” small businesses say
“This really has the potential to be catastrophic,” said Swierk, president of Direct Steel and Construction. “If we have to shut down a project, 300 people no longer work. What do we do then? Do we keep people on salary? Should we lay them off?”
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Small business owners across the country say they are watching with trepidation as debt ceiling negotiations continue perilously close to a June 1 “X-date” deadline, when Washington could begin to run out of money to pay the bills if Congress. does not increase the state’s borrowing limit. The missed payments — to businesses but also to people who rely on government paychecks, food stamps, Social Security and other federal benefits — can quickly ripple through the economy, affecting not only people who don’t get paid but also the supermarkets where they shop, the restaurants where they eat and the nurseries where they drop off their children.
“What’s the contingency plan if we wake up on X-date and don’t have enough money to pay everyone? We just don’t know, said David Berteau, executive director of the Professional Services Council, a trade association of federal government agencies. “There has been remarkably little visibility into what happens if we default. Which bills will be paid and which won’t? We’re talking paychecks, rent, contract invoices, utility bills.”
A default could quickly have far-reaching consequences, including 7.8 million lost jobs and a loss of $10 trillion in household wealth, according to estimates from Moody’s Analytics. But even if it’s a last-minute deal, many say recent instability has already shaken their businesses and added stress at a time when they are already struggling to deal with high prices, rising borrowing costs and a downturn in consumer spending.
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Karns Quality Foods, which has 10 supermarkets in southern Pennsylvania, is bracing for a potential disruption in sales if food stamps, Social Security checks and other federal benefits are delayed in early June due to an inability to reach a debt settlement. Approximately 10 percent of the company’s transactions are financed with federal assistance, the Supplemental Nutrition Assistance Program (SNAP), and many buyers rely on Social Security checks or are government employees.
Andrea Karns, the company’s vice president of sales and marketing, said she’s seeing signs that customers are trying to plan ahead: More people are buying meat in bulk and choosing cheaper items like chicken and pork instead of beef, especially after the pandemic-related boost to food stamps was rolled out back in March. The chain stocks its meat counters accordingly, and also adds more store brands to the shelves.
“Any break, any delay, any cut in SNAP benefits will directly affect our clients’ ability to put food on the table, and that will affect us 100 percent,” Karns said. “There’s certainly a lot of concern about what could happen.”
That concern extends beyond small businesses to the world economy. Treasury Secretary Janet L. Yellen has warned of “economic disaster” if Congress does not reach a deal in time. US credit ratings would be downgraded, borrowing costs would rise, and stocks, bonds and the US dollar would tumble, almost certainly tipping the economy into recession.
The US lost its coveted AAA rating in 2011, after months of political deadlock over the debt limit. Although politicians had already reached an agreement, ratings agency Standard & Poor’s said the protracted battle was a sign that US policymaking was “becoming less stable, less efficient and less predictable than we previously thought.”
“A failure to raise or suspend the statutory debt limit would trigger severe financial market turbulence and lead to a self-inflicted recession,” said Gregory Daco, chief economist at EY-Parthenon. “Even a short-term crisis would have serious consequences for the financial markets, the economy and its international reputation.”
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Jonathan Graf, a behavioral health specialist in northwestern Oregon, relies on Medicaid for most of his income. He works with children and adults in crisis, many of whom have developmental disabilities and need immediate help.
A possible default will likely mean you won’t get paid in early June. More broadly, he said he is nervous that a debt ceiling deal could eventually include a Republican proposal to tie Medicaid benefits to work requirements, which would leave many of his clients without care, and Graf without pay.
Meanwhile, Graf is working overtime to complete as much work as possible before the end of the month, in case he can’t get paid through Medicaid after June 1. If that happens, he said he may have to close the store temporarily, even though his waiting list is the longest in 20 years.
“So many of us are already strained and struggling,” he said. “And now there’s this great weight of impending economic doom. The longer they stretch this out, and the more it goes to the wire, the more it affects us.”
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That uncertainty comes at a time when many small businesses are already struggling to secure loans from regional banks that have clamped down on lending after the failure of Silicon Valley Bank, First Republic and others this spring. The hit will likely be most immediate to the tens of thousands of small businesses that perform contract work for the federal government, according to Joe Wall, national director of 10,000 Small Businesses Voices, a small business lobby organized by Goldman Sachs.
And while it is not clear how the government would prioritize its payments if it were to default, small business groups say they are likely to be at the bottom of the list.
“A lot of small companies have built their businesses around working with the Pentagon or other government agencies,” Wall said. “These businesses are particularly nervous because it feels like this is another problem layered on top of an already complex environment.”
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Trident Builders, a Baltimore construction company, is scheduled to begin work on a federal building on Monday. The months-long project, which will require demolishing an existing structure and building a new one, has been in the works since last year. But owner Brendan McCluskey said he is concerned it could soon grind to a halt if the debt limit is not lifted.
“We’re going to make a million dollars next month from a federal client, but do we want it? I don’t know, he said. “I have nothing to back up anymore.”
Clients – both public and private – have already started canceling projects and scaling back plans as a result of rising interest rates and economic uncertainty, he said. At the same time, materials such as copper, steel, wood and electrical equipment have become more expensive, and long shipping delays have cut into his cash flow. Earlier this month, McCluskey had to dip into a savings account to pay his 12 employees because he could not yet bill the government for an order that had not arrived.
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McCluskey is no stranger to debt talks. The national border has been renegotiated five times in the eight years since he started his business. This time “feels scarier,” he said, though he hopes Congress will strike a last-minute deal.
“I mean, I have to have some faith that the worst is not going to happen,” he said. “I think this is an awful lot of brinkmanship. But if that happens, I don’t really have a plan. We are in an impossible position.”