Economy Watch: S&P Lowers the Downgrade Boom

3 min read

On Friday evening, Standard & Poor's went where no rating agency has gone before by downgrading long-term U.S. sovereign debt.

On Friday evening, Standard & Poor’s went where no rating agency has gone before by downgrading long-term U.S. sovereign debt. Did the agency boldly go there, or was it merely trying to show how tough-minded it is, considering the major agencies’ unfortunate habit of giving a pass to a lot of toxic mortgage-backed securities sold in the mid-2000s?

The new rating for the USA is AA+, which in S&P parlance—to quote the agency itself—means a “very strong capacity to meet financial commitments.” The plus sign is an added creditworthiness fillip in the positive direction. To quote S&P again: “An obligation rated ‘AA’ differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.” In other words, U.S. debt has a long, long way to go before its Zimbabwe debt.

Still, S&P took to its soapbox on Friday to express its opinion about dysfunction in the U.S. government. The agency said in a statement, “the downgrade reflects our view that the effectiveness, stability and predictability of American policy-making and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.”

Will investors care?

It should be noted, besides the fact that AA differs “only to a small degree” from AAA, that the downgrade is for long-term debt only. Also, the possibility of such a downgrade had been anticipate—or at least talked about—and for the moment neither of the other two major rating agencies, Moody’s Investor Service and Fitch Ratings, is going along with the downgrade.

Besides that, the downgrade is completely unprecedented, so no one knows how investors will react. Panic is a distinct possibility, especially given the mood of investors right now, but a more measured reaction is also possible. Equity markets in Asia were heading downward on Monday morning (Sunday evening in the United States), but it isn’t clear the downgrade is primarily responsible. There’s plenty else out there to spook investors, such as the situation in Europe.

The politics of the downgrade was in full swing on Sunday. David Axelrod, former adviser to President Obama, and Sen. John Kerry, among other Democrats, labeled the event the “Tea Party Downgrade.” Both Democrats and Republicans also began casting aspersions on the credibility of Standard & Poor’s.

U.S. job market treads water in July

The Bureau of Labor Statistics reported that 117,000 jobs were added to the U.S. economy in July, but what it was really reporting was stasis. That number of added jobs is better than no jobs, or a loss of jobs, but it’s only roughly enough to keep up with the natural expansion of the pool of working-age adults in the United States.

Still, as usual, some sectors did better than others. The BLS reported that there were employment gains in July in health care, retail trade, manufacturing and mining. Government employment, now vexed by austerity at all levels, continued to trend down.

Before the news about the downgrade on Friday, but after the report from the BLS about U.S. employment, Wall Street took something of a breather from its crash on Thursday. The markets ended mixed, with the Dow Jones Industrial Average gaining 60.93 points, or 0.54 percent. The S&P 500 lost a scant 0.06 percent, but the Nasdaq took another beating in the form of a 0.94 percent loss.

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