S&P revises outlook on U.S. credit rating to 'stable' from 'negative'

Two years after rattling Washington by downgrading the U.S.’s credit rating, Standard & Poor’s struck a more optimistic note Monday about the government’s fiscal future, announcing it has revised its credit rating outlook for the United States from negative to stable, citing an improving economy and recent budget deals.

Financial markets took the 2011 credit downgrade in stride, but it was an embarrassing rebuke for Congress and the administration to have the government’s pristine credit rating tarnished on their watch.

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On Monday, S&P said it was improving its credit outlook because of “tentative improvements” on several fronts, including the fiscal cliff deal that helped put a dent in the deficit and “stronger-than-expected private-sector contributions to economic growth” coupled with the recent profits of Fannie Mae and Freddie Mac.

“We see some improvements lately in terms of moving gradually … toward some fiscal consolidation,” S&P analyst Nikola Swann said on a conference call. “The Budget Control Act of 2011 made a plan for this. It was not clear in our minds that would hold for very long, but so far it has held.”

Swann added that sequestration has also helped improve the nation’s fiscal picture.

“That’s not to say that sequestration is the best way to do it,” Swann said. “But it does result in some improvements to the deficit measures.”

The upgrade was an encouraging sign for the Treasury Department.

“We’re pleased that they are recognizing the progress in the U.S. economy and fiscal results,” Treasury Under Secretary for Domestic Finance Mary Miller said, adding that the department heard of the news a few minutes before it was public but did not have “any heads up on this.”

The ratings firm said the ability of U.S. elected officials to address the country’s fiscal challenges has “decreased in the past decade due to what we consider to be increased partisanship and fundamentally opposing views by the two main political parties on the optimal size of government.”

It also predicted “political posturing” later this month over the debt ceiling as the country once again nears its borrowing cap but said it does not expect this debate to result in “sudden unplanned contraction in current spending.”

“We also note that with the fiscal cliff deal earlier this year, there was at least some limited willingness and ability to compromise shown between the two parties — even if it was a last minute deal and limited, nevertheless, we did get movement from both sides,” Swann said during the conference call.

Miller said Treasury would still like to see progress “on things like the U.S. debt ceiling.”

The credit rating agency downgraded the U.S. credit rating from AAA to AA+ in the summer of 2011 amid the debt ceiling crisis, which raised serious questions about Washington’s ability to put the country’s economic health before politics.

The long-term sovereign credit rating of the U.S. remains AA+.

The news comes days after the Labor Department released its jobs report for May on Friday, which showed that the economy had added a slightly better than expected 175,000 jobs. Several other recent positive economic indicators include rising housing prices and high levels of consumer confidence.

Analysts warn, however, that the economic recovery could be hit by the effects of sequestration — the billions of dollars in spending cuts that went into effect in March — later this year. Markets are also closely watching the Federal Reserve to gauge when the central bank will begin to back off its quantitative easing policies.