US default 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 close a project, there are 300 people who are no longer working. Then what do we do? Do we keep people on the payroll? Do we fire them?

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Small business owners across the country say they are watching uneasily as debt ceiling talks drag dangerously close to the deadline, the so-called “X-date” of June 1. when Washington could start running out of cash to pay its bills if Congress does not raise the government’s borrowing limit. Those missed payments — to businesses but also to people who rely on government paychecks, food stamps, Social Security and other federal benefits — could quickly hit the economy, hitting not just people those that are not paid, but also supermarkets. where they shop, the restaurants where they dine and the day care centers where they leave their children.

“What is the contingency plan if we wake up on date X and don’t have enough cash to pay everyone? We just don’t know,” said David Berteau, executive director of the Professional Services Council, a trade association for federal government contractors. “There has been very little visibility into what happens if we default. Which invoices will be paid and which will not? We’re talking paychecks, rent, contract bills, electric bills.”

A default could have rapidly cascading consequences, including the loss of 7.8 million jobs and a $10 trillion loss in family wealth, according to Moody’s Analytics estimates. But even if there is a last-minute deal, many say the 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 setbacks in consumer spending.

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Karns Quality Foods, which has 10 supermarkets in southern Pennsylvania, is preparing for a possible disruption in sales if food stamps, social security checks and other federal benefits are delayed in early June due to failure to reached a debt agreement. About 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 customers are trying to plan ahead: More people are buying meat in bulk and opting for lower-priced items like chicken and pork over steaks, especially after of the pandemic. increases to food stamps were reduced in March. The chain is stocking its meat counters accordingly and also adding more store brands to its shelves.

“Any pause, any delay, any cut to SNAP benefits would directly affect our shoppers’ ability to put food on their tables and it would 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 global economy. Treasury Secretary Janet L. Yellen has warned of “economic catastrophe” if Congress does not reach an agreement on time. US credit ratings would be lowered, borrowing costs would rise, and stocks, bonds, and the US dollar would fall in disarray, almost certainly sending the economy into recession.

The United States lost its coveted AAA rating in 2011 after months of political deadlock over the debt limit. Although the politicians had already reached an agreement, ratings agency Standard & Poor’s said the protracted fight was a sign that US policymaking was “becoming less stable, less effective and less predictable than what we previously believed.

“Failure to raise or suspend the statutory debt limit would unleash severe turmoil in financial markets and lead to a self-inflicted recession,” said Gregory Daco, chief economist at EY-Parthenon. “Even a short-term crisis would have serious implications for financial markets, the economy and its international reputation.”

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Jonathan Graf, a behavioral specialist in northwestern Oregon, relies on Medicaid for most of his income. He works with children and adults in crisis, many of whom have intellectual disabilities and need immediate attention.

A potential default would likely mean not getting paid by early June. More broadly, he said he’s concerned that a debt-ceiling deal would ultimately include a Republican proposal to tie Medicaid benefits to work requirements, which would leave many of his clients without care and Graf without pay.

In the meantime, Graf is working overtime to finish as much work as possible before the end of the month, in case Medicaid doesn’t pay him after June 1. If that happens, he said he may have to temporarily close the store, even though his waiting list is the longest in 20 years.

“Many of us are already tense and struggling,” he said. “And now there is this great weight of impending financial ruin. The longer they drag this out, and the more it reaches the limit, the more it will affect us.”

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That uncertainty comes at a time when many small businesses are already struggling to get loans from regional banks that have clamped down after the failure of Silicon Valley Bank, First Republic and others this spring. The hit is likely to be most immediate for the tens of thousands of small businesses that contract 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’s unclear how the government would prioritize its payments if it defaulted, small business groups say they would likely 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. “Those companies are particularly nervous because it looks like this is another problem that is overlapping an already complex environment.”

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Trident Builders, a Baltimore construction company, is scheduled to begin work on a federal building Monday. The months-long project, which will require the demolition of an existing structure and the construction of a new one, has been in the works since last year. But owner Brendan McCluskey said he worries it will soon be stuck if the debt limit isn’t lifted.

“We’re supposed to get a million dollars in revenue next month from a federal client, but are we going to do it? I don’t know,” she said. “I no longer have anything to back that up.”

Clients, both government and private, have already begun canceling projects and cutting 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 reduced their cash flow. Earlier this month, McCluskey had to dip into a savings account to pay 12 of his employees because he still couldn’t bill the government for an order that hadn’t arrived.

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McCluskey is no stranger to debt talks. The national limit has been renegotiated five times in the eight years since he started his business. This time he “feels scarier,” he said, though he is hopeful that Congress will reach a last-minute deal.

“I mean, I have to have a little bit of faith that the worst is not going to happen,” he said. “I think this is a great deal of risk. But if it does happen, I don’t really have a plan. We are in an impossible position.”