Small Businesses Are Beginning to Panic about a Government Default

Photo for The Washington Post by Taylor Glascock
Rosemary Swierk, 60, president of Direct Steel and Construction, says half of her firm’s revenue comes from the federal government.

Rosemary Swierk’s company builds about a dozen government buildings a year: Warehouses for helicopter parts. Vehicle maintenance facilities. Low-rises for any number of federal agencies.

Now, though, her biggest client – the federal government, which supplies about half of her Chicago-area firm’s annual revenue – has also become her biggest liability. With U.S. lawmakers locked in a battle over raising the debt ceiling, small business owners like Swierk say their optimism that Congress will soon strike a deal has given way to panic. They are beginning to brace for a worst-case scenario of delayed payments, stalled projects and sweeping layoffs if the nation defaults.

“This really has the potential to be catastrophic,” said Swierk, president of Direct Steel and Construction. “If we have to shut down a project, that’s 300 people who aren’t working anymore. Then what do we do? Do we keep people on payroll? Do we lay them off?”

Photo for The Washington Post by Taylor Glascock
Employees work on the floor of Direct Steel and Construction offices on Thursday.

Small business owners nationwide say they’re watching with trepidation as debt ceiling talks drag on perilously close to the deadline, a so called “X-date” of June 1, when Washington could start to run out of cash to pay its bills if Congress doesn’t raise the government’s borrowing limit. Those missed payments – to businesses, but also to people who rely on government paychecks, food stamps, social security and other federal benefits – could quickly ripple through the economy, affecting not just the people who don’t get paid, but also the supermarkets where they shop, the restaurants where they dine and the child care centers where they drop off their kids.

“What’s the contingency plan if we wake up on X-date and don’t have enough cash to pay everybody? We just don’t know,” said David Berteau, chief executive of the Professional Services Council, a trade association of federal government contractors. “There has been remarkably little visibility into what happens if we do default. Which bills will get paid and which won’t? We’re talking paychecks, rent, contract invoices, electricity bills.”

A default could have fast-cascading consequences, including 7.8 million lost jobs and a $10 trillion loss in household wealth, according to estimates from Moody’s Analytics. But even if there is a last-minute deal, many say recent instability has already rocked their businesses and added stress at a time when they’re already struggling to deal with high prices, rising borrowing costs and pullbacks in consumer spending.

Karns Quality Foods, which has 10 supermarkets in southern Pennsylvania, is steeling for a potential disruption in sales if food stamps, social security checks and other federal benefits are delayed in early June because of a failure to reach a debt deal. About 10 percent of the company’s transactions are funded with federal assistance, Supplemental Nutrition Assistance Program (SNAP), and many shoppers rely on social security checks or are government employees.

Andrea Karns, the company’s vice president of sales and marketing, said she’s seeing signs of customers trying to plan ahead: More people are buying meat in bulk and opting for lower-priced items like chicken and pork instead of steaks, especially after pandemic-related boosts to food stamps were rolled back in March. The chain is stocking its meat counters accordingly, and is also adding more store brands to its shelves.

“Any pause, any delay, any cuts to SNAP benefits would directly affect our shoppers’ ability to get food onto their tables and it would 100 percent impact us,” said Karns. “There is certainly a lot of concern about what might happen.”

That concern extends beyond small businesses to the world economy. Treasury Secretary Janet L. Yellen has warned of “economic catastrophe” if Congress doesn’t reach a deal in time. U.S. credit ratings would be downgraded, borrowing costs would rise, and stocks, bonds and the U.S. dollar would fall into disarray, almost certainly tipping the economy into recession.

The United States lost its coveted AAA rating in 2011, after months of political gridlock over the debt limit. Even though politicians had already reached an agreement, rating agency Standard & Poor’s said the protracted fight was a sign that the U.S. policymaking was “becoming less stable, less effective, and less predictable than what we previously believed.”

“A failure to raise or suspend the statutory debt limit would trigger severe financial market turbulence and lead to a self-inflicted recession,” said Gregory Daco, chief economist at EY-Parthenon. “Even a short-term crisis would have severe implications for financial markets, the economy and its international reputation.”

Jonathan Graf, a behavioral specialist in northwest Oregon, relies on Medicaid for most of his income. He works with children and adults in crisis, many of whom have intellectual disabilities and need immediate care.

A possible default would likely mean not getting paid in early June. More broadly, he said he is nervous that a debt ceiling deal might ultimately include a Republican proposal to tie Medicaid benefits to work requirements, which would leave many of his clients without care, and Graf without pay.

In the meantime, Graf is working overtime to finish as much work as possible before the end of the month, in case he can’t get paid through Medicaid after June 1. If that happens, he said he may have to temporarily close up shop, even though his waitlist is the longest it’s been in 20 years.

“So many of us are already strained and struggling,” he said. “And now there’s this big weight of impending financial doom. The longer they stretch this out, and the more it goes to the wire, the more it affects us.”

That uncertainty comes at a time when many small businesses are already struggling to secure loans from regional banks that have clamped down on lending following the failure of Silicon Valley Bank, First Republic and others this spring. The blow is likely to be most immediate for the tens of thousands of small businesses that do contract work for the federal government, according to Joe Wall, national director of 10,000 Small Businesses Voices, a small-business lobby organized by Goldman Sachs.

And although it isn’t clear how the government would prioritize its payments if it were to go into default, small-business groups say they would likely be at the bottom of the list.

“A lot of small companies have built their businesses around doing work with the Pentagon or other government agencies,” Wall said. “Those businesses are particularly nervous because it feels like this is another problem that’s being layered onto an already-complex environment.”

Trident Builders, a construction firm in Baltimore, is scheduled to start work on a federal building on Monday. The months-long project, which will require demolishing an existing structure and constructing a new one, has been in the works since last year. But owner Brendan McCluskey said he’s worried it could soon stall if the debt limit isn’t lifted.

“We’re supposed to do a million dollars in revenue next month from a federal client, but will we? I don’t know,” he said. “I have nothing to back that up anymore.”

Clients – both government and private – have already started canceling projects and paring back plans as a result of rising interest rates and economic uncertainty, he said. At the same time, materials like copper, steel, wood and electrical equipment have gotten pricier, and long shipping delays have cut into his cash flow. Earlier this month, McCluskey had to dip into a savings account to pay his 12 employees because he couldn’t yet bill the government for an order that hadn’t arrived.

McCluskey is no stranger to debt talks. The national limit has been renegotiated five times in the eight years since he started his business. This time “feels scarier,” he said, though he’s hopeful Congress will strike a last-minute deal.

“I mean, I have to have a little bit of faith that the worst is not going to happen,” he said. “I think this is an awful lot of brinkmanship. But if it does happen, I really don’t have a plan. We’re in an impossible position.”