Economy Faces Hit In Government Shutdown


Washington (AFP) – The shutdown of the U.S. government will hit an an economy struggling to sustain its post-crisis rebound, but economists say the impact will only be substantial if it lasts weeks.

There was no compromise in sight Monday that could prevent an impasse over a stopgap budget bill from forcing a partial government closure on October 1, the beginning of the fiscal year.

That would put more than 800,000 non-essential government workers on unpaid furlough, crimping their spending, and deny important services to citizens and businesses.

It would also slow the flow of funds to government contractors, another effect that would mount the longer the shutdown continues.

Consultants Macroeconomic Advisors said the shutdown would slow growth, which registered a 2.5 percent annual pace in the second quarter and is expected to remain there for the third.

A two-week shutdown would cut 0.3 percentage point off of gross domestic production, all of that in the government.

“Because we expect any shutdown to be brief, induced effects on private production and repercussions in financial markets would be modest,” they said. “But output would rebound in first quarter of next year.”

On the other hand, a protracted shutdown would more broadly disrupt private sector output and spark more turbulence in financial markets.

And if it ties into a concurrent fight over raising the debt ceiling — which many say is a more dangerous issue — the damage could be significant.

Federal Reserve Chairman Ben Bernanke cited both issues on September 18 when he stunned markets by announcing that the Fed would not reduce its $85 billion a month stimulus program.

Bernanke said Fed policy makers were wary of “very serious consequences for the financial markets” of the clash over fiscal issues.

Mark Zandi of Moody’s Analytics said a month-long shutdown could take up to 1.4 percentage points from growth.

The impact will be scattered.

National Parks and museums will close, hurting tourism in some areas. Various permit services, like issuing passports, would halt, hurting businesses and travelers.

Possibly 400,000 civilian defense workers would stay at home, slowing down contracts with private suppliers.

The largest impact would be in the federal hub Washington, which could lose $200 million dollars a day, Stephen Fuller of George Mason University told the Washington Post.

Daniel Meckstroth, an economist at the Manufacturers Alliance for Productivity and Innovation, pointed out that is was unknown when the 1.3 million essential workers who continue to report to duty will get paid or whether the furloughed workers would eventually receive their lost pay.

“In the past, Congress has always paid furloughed workers when the budget agreement is achieved, but there is no guarantee,” he said.

The record for the shutdown at the end of 1995 suggests the impact is significant but mostly reversible. The government closed for five days that November, reopened and then shut again for 28 days over December-January.

The pace of economic growth lost nearly a full point from the third quarter of 1995 to the first quarter of 1996, slowing to 2.6 percent. But it sprang back to a 7.2 percent pace in the second quarter of 1996.

For most economists, the larger worry is a continuation of the impasse into the issue of raising the country’ debt ceiling.

The government spends around $60 billion a month more than it brings in. That money that is already committed and so funding must be found or something else must give.

The Treasury says it will run out of cash and flexibility from October 17, and if the statutory cap on borrowing is not increased, it will have to withhold some payments.

That could mean payments for salaries, retirement and health benefits, or even debt service.

“If the government loses its legislative authority to borrow, it would need to slash spending to pay all of its bills,” said Douglas Porter, chief economist at BMO Capital Markets.

Such cuts “could easily tip the economy into recession, and that’s not even considering the ripple effects on confidence and markets of a possible technical default,” he said.


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