With the imminent threat of default removed for now, the next potential challenge to the economy could come from sequestration, the across-the-board automatic government spending cuts that were the price of the last fight over the debt ceiling. To avoid sequestration, Congress must find a way to either add revenues or reduce spending by $85 billion by March 1. Then, by March 27, Congress has to pass a continuing resolution to fund government operations.
In a Jan. 13 memo to clients, Pete Davis of Davis Capital Investment Ideas said he expects Congress will figure out a way to avoid sequestration.
"They will go to great lengths to avoid sequester; it is unlikely to go into effect," he says.
Even if sequestration were to go into effect and Congress were to fail to pass the continuing resolution, budget experts don't believe that would drive the economy into a downturn unless the congressional impasse dragged on for a long time.
But the potential for a default on the debt could be even more dangerous for the economy than the fiscal cliff, says Dan Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation (MAPI) in Arlington, Va.
"If we went over the fiscal cliff, we would have gone into a recession that would have lasted no more than two quarters," he explains. "But we would have come out of it, and because of the combination of tax increases and spending cuts, we would have been on a path to stability."
With even a slight prospect of a default, "the markets could react very badly," says Mr. Meckstroth. "The last thing you want is a default on the interest on your securities," he warns. "Just the possibility is a dangerous situation."
The last time Congress pushed back on raising the debt ceiling was August 2011. The Dow fell more than 620 points the day after Standard & Poor's downgraded the US credit rating amid the partisan rancor. In its downgrade, S&P said it was pessimistic the two sides could reach a broader compromise that would stabilize the US fiscal situation.