If the U.S. defaults on its debt, it would not be good news for anyone, but economists say it would be particularly bad news for Arizona.
Travel and tourism would likely be hit hard by a long-term breach in the nation’s debt payments, according to a report by Moody’s Analytics, which identified Arizona as one of the tourism-dependent states that would see sharp job losses as a result.
“Attractions like the Grand Canyon, Sedona, obviously, the Phoenix area, which is especially big for business travel, I think all of that takes a significant hit,” said Adam Kamins, a senior director at Moody’s Analytics and one of the authors of the report.
It’s just one scenario from economists, who say a short-term breach – or “even a narrow miss on default” – could roil markets and affect housing, senior income, military spending and more, all important sectors of the Arizona economy.
Few think that the Biden administration will fail to reach a deal with House Republicans to raise the debt ceiling by June 5. That’s the day that Treasury Secretary Janet Yellen has called the “X-date” after which the U.S. won’t be able to pay its bills and will go into default.
The issue is the nation’s $31 trillion debt limit – if it’s not raised, the U.S. will not be able to borrow more money to pay the bills it has already incurred. The limit has been raised multiple times in past decades and is usually noncontroversial, but Republicans have said they will not approve an increase without guarantees to cut future federal spending.
President Joe Biden initially refused to negotiate on the debt limit. But the administration relented in recent weeks, and negotiations have continued haltingly as the X-date draws near.
Both Biden and House Speaker Kevin McCarthy have said default is not an option. Economists agree that a default is unlikely, saying it would be a “catastrophic economic event.”
“The odds of default are more than the odds of getting hit by an asteroid,” said Dennis Hoffman, an economist at Arizona State University’s W.P Carey School of Business. “It’s likely that we’ll have all this posturing and come to some agreement and we’ll move on like we have countless other times.”
Kamins and other Moody’s Analytics economists agree. They believe there’s an 85% chance that the U.S. will not default and “everything turns out generally OK.” But they also believe there is a 10% likelihood of a short breach, lasting less than a week, and a 5% chance of a prolonged breach of several weeks or more.
Kamins said a short breach would be felt immediately by federal workers and military contractors and next by Arizona’s senior population, which could lose out on Social Security checks and Medicare if the situation goes unresolved. Census Bureau data shows that 18.3% of Arizona’s population is 65 or older, compared to a national rate of 16.8% in 2020.
“In Arizona, I think it’s especially concerning, given the large retiree population, the fact that there is a very high percentage of seniors … compared to the rest of the country,” Kamins said. “So Social Security payments, Medicare payments, they may halt until the debt ceiling situation is resolved.”
More damaging would be a prolonged breach, which would affect states “subject to ups and downs in the business cycle.” That includes states whose economies are built on manufacturing, vehicles and tourism.
As of March 2023, the leisure and hospitality industry employed 345,000 workers, an all-time high for Arizona. Arizona’s Office of Tourism reported over 40 million visitors spent more than $20 billion in 2021.
Even if lawmakers can reach a deal after a gap of weeks, Kamins said there will be “enough negative momentum at that point to drive a deep recession” that could end up costing Arizona anywhere from 78,900 to 188,100 jobs.
“Arizona will be hit harder than most states and will take quite a while to come out of that vicious cycle,” he said.
Hoffman said Arizona already saw the economic impact of decreased tourism during the Covid pandemic. But he said a breach would affect other budding sectors in Arizona, too. He pointed to Taiwan Semiconductor Manufacturing Co.’s recent pledge to invest $40 billion in Arizona, saying it could be put at risk by a default.
“There are huge numbers of jobs tied to these prospective private investments which, in turn, depend on federal government programs for support,” Hoffman wrote in an email.
Hoffman also sees instability in Arizona’s real estate sector, which he said is facing pressures from the recent Silicon Valley Bank collapse and the Federal Reserve Board tightening financing options for homebuyers.
“We’re struggling right now with our real estate sector. It’s far worse today than it was a year ago today,” Hoffman said.
In a call with reporters last week, Heather Boushey of the president’s Council of Economic Advisers said a debt ceiling breach would affect “anybody who is looking to get a mortgage in any state.”
Kamins said analysts have not seen urgency from Washington to make a deal. That is partly because the financial markets have not reacted and partly because an expected influx of tax returns on June 15 could be giving a false sense of security.
Hoffman compared the current situation to the 1991 movie “Thelma and Louise.”
“Unlike an asteroid, which is a random, unstoppable, unpredictable event, this … would be a concerted action on the part of our Congress and administration collectively to drive that car off into the Grand Canyon,” Hoffman said, “I guess while they’re both sitting in the front seat blaming each other for the action.”