Trump, Democrats Avert ‘Wile E. Coyote’ Moment With Budget Deal

(Bloomberg) -- The Wile E. Coyote scenario for the U.S. economy looks like it’s been put to rest.

A two-year budget deal hammered out by President Donald Trump and lawmakers Monday would remove the risk of a big contraction in federal spending in 2020 that could have dragged the economy down.

That’s a situation that former Federal Reserve Chairman Ben Bernanke likened to Wile E. Coyote going off the cliff, referring to the hapless character in the Road Runner cartoon series who was prone to crash landings.

Another plus: The agreement, which still must clear Congress, suspends the debt ceiling until July 31, 2021 -- putting off the remote yet economically-devastating chance of a U.S. government default.

“It takes out tail risk,’’ said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co.

That should be good news for current Fed Chairman Jerome Powell, who earlier this month cited the debt ceiling as one of the uncertainties hanging over the economy.

While the removal of default risk won’t deter the central bank from cutting interest rates next week, it does argue at the margin against a more-dramatic reduction of a half-percentage point, Feroli said.

Under the terms of the budget deal, Republicans secured $738 billion in defense spending for 2020 and $741 billion for 2021, while Democrats got $632 billion in 2020 and $635 billion in 2021 for domestic outlays. That amounts to a $320 billion boost in spending over two years compared to lower budget caps that would have slashed expenditures at the end of this year.

Fiscal Drag

If the caps had remained in force, they might have dragged economic growth down in 2020 by a half to three-quarters of a percentage point, economists said.

That’s the Wile E. Coyote scenario Bernanke referred to and something that Trump surely wanted to avoid in a presidential election year.

“The main thing is that you don’t have a contraction in economic activity coming from some sort of fiscal cutoff point,’’ said James Sweeney, chief economist at Credit Suisse Group AG.

He said though that economists are unlikely to make major upgrades in their economic growth forecasts, because some sort of budget deal had been widely expected.

Gross domestic product is projected to expand 1.8% next year after rising 2.5% in 2019, according to the median forecast of economists surveyed by Bloomberg News earlier this month.

Waning Stimulus

Part of the slowdown that economists foresee in 2020 is caused by waning fiscal stimulus -- a development that the budget deal doesn’t materially change.

Moody’s Analytics Inc. chief economist Mark Zandi said fiscal policy likely will be neutral for the economy next year, after pushing up growth by 0.4 percentage point this year and 0.7 point in 2018, when taxes were cut and spending was increased.

The bottom line though is that neither major political party has any appetite for reining in spending or the budget deficit, which remains on course to top $1 trillion a year. Powell has said the gap has “long been on an unsustainable path.”

“We’re off to the races on deficits and debt,” Zandi said.

To contact the reporters on this story: Rich Miller in Washington at rmiller28@bloomberg.net;Ryan Haar in New York at rhaar3@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Scott Lanman

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