America is coming off several months of a highly dramatized debate over taxation, but the next round of what will probably be more contentious discussions in Washington D.C., could have a fresh, and detrimental, effect on an economic recovery, experts say.
The U.S. is facing a deadline in about six weeks about raising the federal government's debt ceiling. Political factions in Washington, who may try to tie negotiations to spending cuts, could turn these talks into another hostile partisan debate, according to some business leaders.
Economists say it could be a replay of the summer of 2011, when the failure to negotiate a debt ceiling deal led to Standard and Poor's lowering the U.S. credit rating because of the possibility that the country would default on its loans. A lowered credit rating usually drives up interest rates, which makes it harder for businesses to borrow the working capital they need to finance ongoing operations or expand.
It would also hit consumers, especially those considering a move into a recovering housing market, one of Inland Southern California's economic weak points for more than five years.
Esmael Adibi, Chapman University's chief economist, said he is certain the debt ceiling will be increased, but he said there could be problems if both parties insist on specific spending cuts.
"Drawing out the debate would be a disaster," Adibi said. "If they don't do something meaningful, the bond market would start to punish us. That could do a lot of damage in a lot of areas, including housing."
Mortgage rates nationally have already been creeping up, according to a report from the Mortgage Bankers Association. The average interest rate for a 30-year fixed mortgage for the week ending Jan. 4 rose from 3.52 percent to 3.61 percent.
The level of uncertainty could be affecting small business owners who go to banks for loans, said Vincent McCoy, executive director of the Inland Empire Small Business Development Center. The cautious spending by consumers and businesses over the last six months has already slowed down activity for many entrepreneurs, even the ones with good business plans.
And, looking ahead, many business owners can't predict what kind of cash flow they'll have, especially if they rely on government contracts, he said.
"Revenue streams are smaller and sales are smaller," McCoy said. "They'll look less attractive."
Small businesses create about two-thirds of all new jobs in Riverside and San Bernardino counties, but Vistage International, a San Diego-based small business owners trade group, reported that one in four small- or medium-sized businesses scaled back on investment and hiring in the latter part of 2012. The study was based on a poll of about 1,600 CEOs.
Bruce Springer, a senior vice president at commercial real estate broker Lee & Associates who mostly puts together big-box property deals in the Moreno Valley area, said he's worried about the debt debate and its possible side effects. Not only do property sales depend on credit, but so do the entrepreneurs that set up distribution complexes, and these are major employers in the Inland area.
"I don't understand why we're in this position. It's beyond the scope of my understanding," Springer said. "If we operated like this, we'd be out of business, shackled and in the clink."
Some of these issues may be affecting consumer spending as well. Bill Hatfield, owner of Hatfield Automotive Group, a Redlands General Motors dealership, said the threat of interest rates going up is always a concern for his business.
Hatfield said sales during the last quarter of 2012 were actually good, but many customers seemed clouded with doubts before they signed papers.
"Any time there's this level of uncertainty and negativity like we're seeing now, it makes people want to sit at home and hunker down," Hatfield said.
(c)2013 The Press-Enterprise (Riverside, Calif.)
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