Government shutdown: How much will it harm the economy? (+video)
A government shutdown won't have much of an economic impact if it lasts just a few days, but a prolonged shutdown could become a drag on overall consumer and business confidence.
The US government shutdown that began Tuesday is a nuisance to many Americans and a hardship for legions of federal employees, but its impact on the economy is expected to be only modest – at least at first.Skip to next paragraph
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That’s the widely held view of forecasters. Economic damage could rise, however, if this partial halt of federal activity starts running longer than a week or two.
“Most of the federal government will keep running in the event of a shutdown, but a significant number of federal employees will be furloughed without pay, perhaps as many as one million,” write economists Ethan Harris and Michael Hanson of Bank of America Merrill Lynch. “The impact on … GDP growth should rise with the length of the shutdown.”
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In their estimate, the first couple of days of shutdown has little discernible impact on gross domestic product (GDP) for the fourth quarter. But a two-week shutdown could lop half a percentage point off the annualized pace of economic growth for the quarter.
For reference, economists in a recent survey predict that GDP will grow at a 2.6 percent rate in the fourth quarter.
If the shutdown goes on for a full month, the Merrill Lynch economists see a harsher toll, crimping that growth rate by 2 full percentage points.
Many economists are more optimistic. The investment firm Morgan Stanley pegs the likely drag on growth at 0.15 percentage points for each week of a shutdown.
“For every day of shutdown, federal compensation … is reduced by $400 million,” said economist Alec Phillips of Goldman Sachs, in an analysis Wednesday. “The effect is linear; a five-day shutdown would have five times the effect of a one-day shutdown.”
Economists acknowledge, however, that predicting how the shutdown will affect the economy involves crude estimates.
An important wild card, for example, is whether the sight of disarray in Washington will affect wider consumer confidence – resulting in declines in spending or stock prices.
Efforts to estimate the shutdown’s impact stem in part from past experience. This isn’t the first time America has seen a partial shutdown as Republicans and Democrats tussle over legislation to fund the government.
During a US government shutdown back in 1995-'96, effects on the US economy were modest and there was minimal global impact.
But a few caveats to a “not to worry” conclusion are worth noting:
- Effects on consumer confidence could grow if the shutdown persists. Economists generally agree with a line President Obama gave in a public appearance this week: “The longer this shutdown continues, the worse the effects will be.”
- This isn’t 1996. Back then, the economy was well clear of recession, entering an era that would prompt the Federal Reserve chairman to voice a question about “irrational exuberance” in the stock market. Today, the economy is growing but in a much more fragile way, both within the US and in other nations. And unemployment remains high, at 7.3 percent in the US and 12 percent in the euro zone.
- The shutdown isn’t happening in isolation. By about Oct. 17, the US Treasury is set to run out of borrowing room. That prompts the need for Congress to act to raise the statutory cap on US debt, which currently stands at $16.7 trillion. That promises to become another case where fiscal legislation could bog down in partisan rifts over things like federal spending, tax reform, and Obamacare.