A warning against the US economy: Will it get worse?

This story was originally covered by PRI’s The Takeaway. For more, listen to the audio above.

On Monday, the Standard & Poor’s ratings agency announced that it was downgrading United States’ credit outlook from “stable” to “negative” for the first time since they began issuing those ratings in 1989. The negative outlook wasn’t a huge surprise to many in financial markets. “People in the bond market already knew what was going on,” David Wyss, chief economist at Standard & Poor’s told PRI’s The Takeaway. “We’ve been saying it for a few years now that we’re on an unsustainable path.”

Wyss cautions people not to overemphasize the announcement. “We’re not talking about default here, we’re looking at a downgrade, and that’s a little different,” he says. “We do not expect a default by the United States. We don’t think one is likely in the foreseeable future.”

That said, there is a chance that US debt will be downgraded from its pristine AAA rating. “Historically,” Wyss says, “when we put a negative outlook on an entity, we expect about a 1 in 3 chance of a downgrade.” If that happens, the price the US pays for debts could get a lot more expensive.

Some people have taken the move by Standard & Poor’s as a warning to the US government to get its economic house in order. Wyss doesn’t exactly see it that way. “It’d be nice if they took it that way,” he says, “but frankly we’re trying to warn the bond market not the politicians.”

If the government can’t come up with a credible plan to attack the deficit, however, it could do serious damage to the US economy. Wyss says:

Somebody’s got to do something. Both sides [Republicans and Democrats] say they need to do something. There’s agreement that something needs to be fixed, but total disagreement on how to fix it, and frankly we’re concerned just total gridlock on actually doing something about the problem.

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