Net Net: Promoting innovation and managing change
Net Net: Promoting innovation and managing change

Zandi: Debt Ceiling Drama Could Do Some Real Damage To Job Creation

The drama of the debt ceiling may not be playing before the cameras right now as Congress is on summer vacation, but that does not mean the drama is far from over. Many of my CEO sources tell me the waves created by the politicking before the cameras are still crashing ashore. The uncertainity undertoe still exists.

One of my banking CEOs told me small businesses are holding off hiring because of this uncertainity as well as the cost of health care reform. While the employment data has been encouraging, the next batch of employment data will be key to the health of this recovery because the data during this time frame was at the height of the debt ceiling crisis. I asked Moody's Analytics chief economist Mark Zandi about this.

MZ: I think the uncertainty generated by the debt ceiling drama has created a bad business environment for businesses to invest and hire.

We are legislating on very significant issues from health care reform to financial regulatory reform to tax increases and spending cuts.

These are epic decisions and I think it is creating angst and uncertainty. Not only the policy themselves but we are seeing the process unfold. We are literally watching the sausage being made and it is very uncomfortable to some people. I don't think this means businesses will fire workers — that would mean recession. But it does mean that companies have stopped hiring, and that's why the economy’s growth has slowed so sharply.

LL: When you look at the super committee, the make up of the group  is the same cast of characters. There are some members of Congress who get the problem. For instance Rep. Himes (D-CT). He worked on Wall Street, he knows what the markets want. He wanted to be on the Super Committee but Pelosi didn't choose him. With so sides to polarized are you worried this commission will not come up with the cuts that are needed? The consequences of their inaction would be significant since the cuts that would be enacted have some serious teeth in them.

MZ: I give it more than a 50/50 probability for them to come up with something to avoid sequestration. I think they understand the implications of not coming up with something. It probably means a ratings downgrade from all the ratings agencies and more financial turmoil. they also see sequestration will also be pretty painful for spending cuts that no one will like. I do think they will come up with something. I don't think it is a slam dunk but I give it better than even odds.

LL: When the August Jobs number comes out in September, how do you think it will be? This was around the height of the debt ceiling drama?

MZ: That's a good question. Its a key number, my guess it will be 50 to 100 thousand, something in there. I'm taking some solace in the fact the initial claims for unemployment insurance at least through early August held up, and that they did not rise which was very encouraging. some of the July data has been actually pretty healthy, not bad. Industrial production, retail sales, this was before the teeth of the debt ceiling drama, the down grade and the market turmoil, but non the less, those are encouraging signs but I can't imagine this (the debt ceiling drama) does not do some real damage. I think UI claims this week and next will be very important to watch. If they start moving up that would be disconcerting. At this point I would say 50 to 100k. Somewhere in there.

LL: In terms of the President's jobs plan he will unveil in September, what do you hope to see?

MZ: I think at the very least, they need to extend the payroll tax holiday. He will propose a number of other things but in terms of what gets through, it is very important they pass an extension of the payroll tax holiday because that's worth a half a point to GDP growth in 2012.  I'm hopeful they will do some other things like extending UI benefits. There are problems with it but net net, it is also a half a point to GDP in 2012. I am hopeful they make a few changes to allow states to avoid raising taxes on business to fill their unemployment insurance funds, which they will have to do in 2012 if they get don’t get more help from Washington. I assume he will propose more things on the housing side one thing I think would be very helpful is trying to facilitate more mortgage refinancing given how low mortgage refinancing is by asking Fannie and Freddie to temporarily reduce their loans level pricing adjustment for borrowers with lower credit scores and less equity in their homes on loans they already insure or own. My sense is I don't think there is going to be anything massive that will make a big difference in the next 12 to 18 months. I think these will be things on the margin that in a combination could mean a lot.

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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."