It's not just the possibility of a default that has some lawmakers and business leaders worried as the Oct. 17 deadline to raise the debt ceiling approaches. It's also the chance that merely coming close to the deadline could cause enough fear to hurt the economy.
In warning about the dangers of another near-crisis involving the debt ceiling, President Obama's top economic adviser, Gene Sperling, compared the 2011 debt limit debate to the Sept. 11 terrorist attacks or Pearl Harbor in its effects on consumer confidence.
And measures of consumers' outlooks calculated by the University of Michigan and Gallup did show significant drops in late July 2011 as the drop-dead date for raising the limit approached without action from Congress.
Other key measures of Americans’ willingness to spend, such as auto sales, also cratered that summer.
Consumer confidence is usually an leading indicator, meaning that if it falls, that’s normally a warning that the economy will soon slow down as well.
"The last time there was even a threat of default back in 2011, we know that the economy did not grow, it went backwards during that quarter," President Obama said in an interview with CNBC Wednesday afternoon.
In fact, the economy did not contract in the third and fourth quarters of 2011. It grew, despite the sudden drop in consumer confidence, a fact that should allay worries that fear over the debt ceiling is itself a major threat to the economy.
Economic growth did not slow appreciably during the second half of 2011, when consumers’ reluctance to spend would have shown up in the data. This chart of gross domestic product, nominal and corrected for inflation, shows no dent in growth:
The same data, presented by quarter, shows that growth actually picked up toward the end of 2011:
Personal spending, the component of GDP that would be most sensitive to consumer fears, actually grew strongly throughout the second half of 2011. Here’s personal consumption expenditures, tallied by the Bureau of Economic Analysis:
And it does not appear that the debt ceiling fight spooked businesses from investing, either. Here is private fixed non-residential investment, also from the BEA. It had the two best quarters of the post-recession period during and after the debt ceiling showdown:
Most analysts believe that a failure to raise the debt ceiling by deadline is an unthinkable option that would cause serious harm to the economy in the case that the Treasury missed a payment on the debt or any of its millions of other obligations.
And worrying consumers and investors about the possibility is thought to be another obstacle in the way of the economy’s weak recovery. But if 2011’s brush with the debt ceiling is any indication, the economy can weather a brief scare.