White House warns of recession, stock market collapse as debt default looms

The New York Stock Exchange (NYSE) trading hall

White House economists warned today, May 4, of “severe damage” to the US economy in the event of a debt default, warning that a prolonged default could cause 8.3 million job losses and the stock market to shed 45%.

This came in a new report from the White House Council of Economic Advisers, in which they tackled the risks behind America’s failure to lift the government debt limit.

“A protracted default would likely lead to severe damage to the economy, with job growth swinging from its current pace of robust gains to losses numbering in the millions,” the economic advisors wrote.

Without a deal in place between Congress and the White House, Treasury Secretary Janet Yellen warned that the federal government will lack the accounting tools to keep borrowing and potentially begin to default as soon as June 1.

In the report, economists identified the impacts of three debt ceiling scenarios, the first of which is “brinkmanship,” which would see the US economy losing 200,000 jobs and erasing 0.3% of the annual growth rate, even while avoiding debt default.

The second is a “short default" in which Congress acts swiftly to allow the nation to borrow again after defaulting. Consequently, the US economy would lose about half a million jobs and the unemployment rate would rise 0.3%.

The third and worst-case scenario is a “protracted default,” under which the US would lose 8.3 million jobs, with the gross domestic product (GDP) declining by an estimated 6.1%. Further, the stock market would collapse to half its current value, while the unemployment rate would surge 5%.