US Weekly Economic Commentary: The X-date files

Negotiations on raising the debt limit continued this week with reports that President Joe Biden might consider concessions on work requirements and spending caps demanded by House Republicans.

House Speaker McCarthy hinted an agreement might be reached within days before talks reached an apparent impasse on May 19 amid indications that both progressive Democrats and conservative Republicans will balk at the reported contours of the emerging deal. Even if an agreement in principle is reached soon, there may be insufficient time to draft and pass legislation before "X-date" unless the debt limit is temporarily raised or suspended to allow legislators more time to complete their work — a growing possibility.

On May 17, Democrats officially filed a discharge petition to bring a clean debt limit bill to a vote in the House and immediately collected, along strict party lines, 210 of the 218 signatures necessary to advance the petition. Others could join the motion as pressure mounts with the approach of X-date, but passage of the petition will require five Republican defections. Given parliamentary procedures and the legislative calendar, the earliest a vote on the debt limit could take place under the petition is around mid-June.

Sensing the urgency, on May 18, a group of 11 Senate Democrats wrote President Biden urging him, on constitutional grounds, to ignore the debt limit. Our May forecast assumes that the US avoids even a technical default during which some payments (other than debt service) would be delayed, and that financial turmoil surrounding the approach to X-date trims 0.6 percentage point from GDP growth over the second half of this year.

Financial markets expect that, at its meeting in mid-June, the Federal Open Market Committee (FOMC) will pause raising the Fed's policy rate. Core price inflation remains unacceptably high, core price disinflation has essentially stalled, wages (and unit labor costs) are growing faster than is consistent with 2% price inflation, unemployment is the lowest since 1969, job openings remain very high relative to unemployment, and the most recent weekly data suggest the recent drift up in unemployment claims has stalled.

All this is a recipe for additional monetary tightening and, on balance, comments by Fed officials have indeed been leaning hawkish of late. Recent "Fedspeak" likely is predicated on an assumed benign outcome of the debt limit impasse. However, X-date may arrive before the FOMC meeting next month, with the potential to shift the views of the Committee away from its tightening bias — at least temporarily.

This week's economic releases:

• New home sales (May 23): We estimate new home sales declined to an annual rate of 669 thousand units in April from 683 thousand units in March. This would leave them in line with what has been a firming trend since last summer.
• Manufacturers' orders for durable goods (May 26): A 1.0% decline in manufacturers' orders for durable goods in April would leave them in line with a broadly flat trend since last summer. In recent months, prices for manufactured durable goods have been firming.
• Nominal personal income (May 26): We estimate nominal personal income rose 0.5% in April, while nominal personal consumption expenditures (PCE) rose 0.7% and real PCE rose 0.3%. The latter would leave real PCE only 0.7% above the first-quarter average at an annual rate.
• Nominal goods deficit (May 26): We estimate the nominal goods deficit widened in April by $6.2 billion to $91.7 billion.
• GDP growth (May 25): Based on our processing of the source data that has been reported over the last few weeks, we look for first-quarter GDP growth to be revised up by 0.2 percentage point to 1.3% in BEA's "second" estimate. This would leave GDP growth in the first quarter down from readings in the third and fourth quarters of last year: 3.2% and 2.6%, respectively.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.