Short government shutdown? Small hit to economy. Long one? A recession.
A government shutdown would reduce GDP growth by an estimated 0.2 percentage points for every week it goes. Earlier congressional actions on the payroll tax expiration and the sequester have already weakened economic growth, as seen by the latest numbers.
Government shutdown: The economic impact of a shutdown of the federal government depends on how long it lasts. "It's not a disaster provided it doesn't go on a long time," says Nariman Behravesh, chief economist at IHS/Global Insight in Lexington, Mass. "For every one week that the government is closed, GDP growth in the fourth quarter will be reduced 0.2 percentage points." But if it goes on for three or four weeks, the effect on GDP (gross domestic product, which measures the nation's output of goods and services) would be big, Mark Zandi, Moody's Analytics chief economist, told a Senate committee last week. And if it lasts longer than two months, it would probably tip the economy into recession, he added.
The political fallout is so great that economists expect a quick resolution should the shutdown occur. Washington is already responsible for cutting annualized growth in the current quarter by a full percentage point because of the restoration of the federal payroll tax and the spending cuts under the budget sequester, says Mr. Behravesh. The result is that the economy is growing only weakly.
The latest numbers tell the story:
Consumer confidence down: The Conference Board’s monthly read of consumer confidence fell to 79.9 in September, revised downward from 81.8 in August. Meanwhile, the University of Michigan’s Consumer Confidence Index fell 4.6 points in September to its lowest monthly reading since April. “Unease over the budget and debt ceiling uncertainties emanating from Washington may have played some role in the decline in sentiment since the summer, although other factors, such as stock market gains and improvement in the housing market, likely continue to support a gradual upward trend,” Barclays Research economist Peter Newland wrote via e-mailed analysis.
Mixed data for housing: Home prices climbed 0.6 percent in July and 12.4 percent since July 2012, according to S&P/Case Shiller’s monthly index of home prices in 20 cities – the index’s biggest annual increase in 7-1/2 years. New home sales, meanwhile, jumped 7.9 percent in August. But pending home sales fell by 1.6 percent in August, suggesting to some analysts that existing home sales could drop in September.
Mortgage rates sliding: The average rate for a 30-year fixed rate mortgage fell to 4.47 percent since last week, and the purchase application volume increased by 7 percent. Rates are falling in the wake of the Federal Reserve’s announcement that it wouldn’t scale back its asset purchases. The mortgage market had already anticipated the start of the taper, causing rates to rise through the summer.
Jobless claims plunge. Initial filings for unemployment benefits fell to an unexpected 305,000 last week, down 367,000 from a year ago and the lowest level in over six years. Economists are hopeful that the continuing downward trend in jobless claims could mean a more robust recovery for the rest of the labor market. But some are skeptical. “The reported result of was much lower than generally anticipated,” MFR Inc. economist Joshua Shapiro wrote in his e-mailed analysis of the numbers. “Possible explanations include that businesses are laying off fewer workers but hiring also remains sub-par, that the claims data will rebound, or that the labor market really is considerably better than most other data would indicate. Time will tell what the answer is, but our belief is that the claims data should not be taken at face value as they are inconsistent with too much other evidence.”
McDonald’s going healthy? Fast food giant McDonald’s announced Thursday that it would no longer be marketing some of its least healthy items to children, and that it would start to offer fruit and vegetable options for some of its adult menu items, including salad as a side choice in its value menus. The announcement, made in conjunction with the Clinton Foundation’s Alliance For A Healthier Generation campaign against childhood obesity, comes as fast-food chains are facing social and commercial pressures to make their menus healthier. The Center for Science in the Public Interest faintly applauded the move, releasing a statement that "McDonald's slow march toward healthier meals made a major advance today, but a long road lies ahead for the company."