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Debt debacle has companies reluctant to spend

U.S. businesses, mired in a recovery that's stuck in first gear, now have to contend with a new challenge: What to do if the U.S. defaults on its debt.
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U.S. businesses, mired in a recovery that's stuck in first gear, now have to contend with a new challenge: What to do if the U.S. defaults on its debt?

The White House and Congress are scrambling to cut a deal that would avert default before an Aug. 2 deadline, after which the Treasury has said it will begin to run out of cash.

If businesses had been getting ready to use their cash to expand or hire more workers, the uncertainty created by the debt-ceiling deadlock has many battening down the hatches and seeking new sources of financing, according to a story in The Wall Street Journal Wednesday.

"Surveys heading into the year suggested that businesses were ready to deploy cash to invest in labor and capital, and the year has created a lot of uncertainty that has businesses remaining cautious in doing so," Brian Levitt, an economist at OppenheimerFunds in New York, told Reuters.

"We're going to need some clarity over the next week, and if events turn out as the market hopes it will, there is still some impetus for growth as we head out into year-end," he said.

But until a compromise is reached on the debt ceiling, companies will sit tight and do what they can to prepare for the worst.

"This debt imbroglio is just giving companies another excuse not to do much," Joseph LaVorgna, chief U.S. economist at Deutsche Bank, told the Journal. "They are going to hesitate to hire at a faster pace and probably be very cautious on their capital-spending outlook."

In a recent survey by the Association of Financial Professionals, half of the respondents planned to "take defensive actions, such as freeze on hiring, reducing capital spending and drawing on credit lines to build cash," the Journal article said.

Wall Street and corporate America, for the most part, don't believe that the government will allow a repeat of the 2008 financial collapse. Credit ratings agencies have warned that if the U.S. does not come up with a credible debt deal, it risks losing its AAA rating. Economists have warned that if that happens, interest rates would rise, which could push the economy back into recession.

“We're having a massive circus,” Robert Doll, chief investment officer at BlackRock Advisors, told CNBC earlier this week. “It's not going to be fun. In the 12th, maybe 13th hour, we'll get something done. And we move on."

Although all businesses will be affected by a default, small businesses could be hit a lot harder than their larger counterparts. Jack Mozloom, a spokesman for the National Federation of Independent Business, said the overwhelming concern of his member businesses is weak sales, which are caused by frightened consumers.

"They're virtually at the mercy of what happens," he said. "There's very little a small business can do to prepare for a sharp downturn that would be caused by a federal default."

The most small businesses can do to prepare is hold back on any long-term commitments, said small-business owner Warren Hudak, who owns Hudak and Company, an accounting firm in Pennsylvania.

"One of the longest-term commitments a small business can make is about employment," he said. "When you hire a guy, it's not for a day or a week or a month. It's a long-term commitment to that employee. ... This is the long-term commitment that people are really reluctant to pay for right now."

Businesses need a time horizon greater than one year or two years, he said. They need to know they can count on long-term policy.

"Businesses, large and small, need some certainty," he said. "We need to know how to plan."