Industrial suppliers face a rocky road if U.S. defaults on debt- AEM

By Aishwarya Nair

(Reuters) – A failure to break the deadlock on raising the U.S. debt ceiling before the deadline could pose a challenge to capital-intensive businesses such as industrial suppliers, a body representing construction and farm equipment makers said.

The U.S. government could fall behind on its bills next month, and even default on its debt, if Congress does not raise a $31.4 trillion cap on government borrowing, a failure that could trigger economic calamity and panic on global financial markets.

A U.S. debt default would also spike borrowing costs, leaving the suppliers of parts and components to manufacturers such as Deere (NYSE:) Co and Caterpillar Inc (NYSE:) scrambling to fund their operations, the Association of Equipment Manufacturers (AEM) said on Tuesday.

“If we were to see a default or a financial crisis as a result of an impasse, I do not see them (suppliers) being able to weather this storm,” said Kip Eideberg, AEM’s senior vice president of government and industry relations.

The industrial body represents more than 1,000 companies, which make construction and farm equipment, as well as their suppliers.

Negotiators for Democratic President Joe Biden and top congressional Republican Kevin McCarthy reconvened at the White House on Wednesday, but both sides remain deeply divided on how to move forward. 

Higher borrowing costs have already pushed 236 companies into bankruptcy in the first four months of the year, according to data from S&P Global (NYSE:) Market Intelligence. Of these, 23 are from the industrial sector.

The industry is currently living off the strength of its 2023 and 2024 order books as customers replace ageing machines.

“If this crisis continues to linger, then those replacement orders will be delayed further, which will have a negative impact on our industry,” Eideberg said.

Eideberg added that the equipment manufacturing industry is expecting a hit of about 6% to its profit margin in 2023 amid rising borrowing costs.

Earlier this month, farm equipment maker Deere said stocks for critical components are still low, impacting production in the back half of the year.

Deere declined to comment and Caterpillar did not immediately respond to a request for comment.