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U.S. business bruised by budget fight, say economists: Reuters poll

By Andy Bruce and Rahul Karunakar

(Reuters) - U.S. businesses have cut back expansion and hiring plans as a direct result of Washington's budget spat, say a firm majority of economists in a latest warning the recovery will drift until the fighting ends.

Friday's Reuters poll of 76 economists also showed they were split almost down the middle over whether the White House and Congress will agree significant spending cuts over the next two months.

While the Republican-controlled House of Representatives passed a bill on Wednesday to allow the federal government to keep borrowing through to mid-May, they and Democrat President Barack Obama face weeks of wrangling over budget reforms.

Surveyed over the last two days, most economists were clear in their belief the deadlock over the last few months has stymied U.S. businesses' investment and hiring plans.

Kevin Logan, chief U.S. economist at HSBC in New York, said uncertainty about budget policy could persist through this year and even into 2014.

"Until it is resolved it adds risks to business planning, and to potential returns on capital outlays."

Fifty-one said the impasse had delayed corporate hiring and expansion plans by some extent, and eight said by a large extent. The remaining 17 said it had only a minor or no impact.

A Reuters poll earlier this week showed U.S. economic growth would slow to around 2.0 percent in 2013, compared with an estimated 2.3 percent for last year.

While that's better than most of Europe, burdened by harsh budget austerity that the White House wants to avoid, it's still not enough growth to generate substantial new hiring.

Reflecting the schism in Washington, economists were split on whether politicians will agree to make significant spending cuts: 38 said they won't and 36 said they will.

"I am hopeful that significant spending cuts can be achieved as part of a deal on the budget, and hopefully, this would include tax and entitlement reforms," said Chad Moutray, chief economist at the National Association of Manufacturers in Washington, D.C.

"With that said, the ongoing fiscal challenges have had an impact, with a large percentage of manufacturers saying that they have pulled back on hiring and capital spending."

THE RATING GAME

Fitch and Moody's, the two big credit rating agencies that still give the federal government a top-notch "AAA" grade, have warned over the last few weeks the country faces a downgrade unless lawmakers pass a credible plan to cut the budget deficit.

Most analysts -- 53 out of 75 -- said a credit rating cut would not lead to higher U.S. sovereign borrowing costs.

Such a situation failed to materialize after Standard & Poor's abandoned its own "AAA" rating for the U.S. after the budget impasse of 2011, and also for France when it lost its top grade for creditworthiness.

But while U.S. credit rating cuts might not push federal borrowing costs higher, it could still send ripples through the financial system and count against riskier assets, said Lena Komileva of G+ Economics, a consultancy in London.

"A downgrade of the U.S. Treasury's securities would effectively downgrade the ability of the banking system to hedge holdings of riskier assets," she said.

Komileva argues that would favor U.S. Treasuries, and other core government debt markets such as German Bunds and British Gilts, while adding a premium to other riskier debt.

Only one of the 14 economists working for primary dealers -- the firms used by the government to make a market for its debt -- thought a credit rating downgrade would send borrowing costs higher.

(Polling by Snehasish Das; Editing by Ross Finley and Chizu Nomiyama)

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