North Korea and Debt Ceiling Tie as Disasters for US Economy

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Job creation continues to rumble forward and even gain momentum at a pace rarely seen in U.S. history since World War II. Real estate prices continue to soar in many regions. Gross domestic product (GDP) growth hit 3% last quarter. The American economy seems impossible to derail. However, two factors, completely unrelated, could ruin current progress. One is a flare up in the nuclear standoff with North Korea. The other is the battle for an increase in the debt ceiling.

New data show that U.S. GDP moved higher by 3.0% last quarter. Since most forecasts by major economists, the International Monetary Fund and the World Bank are for an American expansion of 2.0% to 2.5% this year, the news was a positive surprise. At the same time, the widely followed ADP measure of private sector jobs created each month reached 237,000 for August. Most analysts forecast less than 200,000. The Case Shiller yardstick of housing prices in the 20 largest U.S. markets posted its largest gain in well over 10 years, according to June data.

Unexpectedly, an S&P analyst has written that a failure to reach a deal on the debt ceiling could bring on a financial disaster similar to the collapse of Lehman Brothers at the start of crisis that threatened the global economy and began the Great Recession. The comment appeared to be hyperbolic, but if the research behind it stands up, the U.S. economy could be seriously troubled again in a matter of months. The prediction is worrisome since a battle in Congress over the issue is likely.

The United States flew some of its military aircraft over the Korean peninsula, almost certainly as a reaction to the North Korean launch of a missile that passed over Japan. Within a day, stock markets around the world continued to rise after a very brief pause. The reason was that the situation had “de-escalated.” But there was nothing to support that case beyond the fact that North Korea did not launch another missile.

As the Dow Jones Industrial Average heads toward a record 22,000 and the signals about the U.S. economy all flash green, it is hard to imagine that all the positive progress could be suddenly wiped out. There are two events, however, that could certainly do that.