For all the political hand-wringing, a U.S. government shutdown on Oct. 1 would barely nick the world’s largest economy.
The partisan debate over the nation’s finances has heated up with almost clockwork regularity, going back to the debt-ceiling fight in 2011 that led to the first-ever downgrade of Treasury debt. Such familiarity breeds contempt as yet another temporary closing of federal agencies will have a muted effect on gross domestic product, payrolls and consumer confidence.
“The economy will be able to shrug it off,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York, and the second-best forecaster of GDP, according to data compiled by Bloomberg. “It’s not going to fundamentally change the trend in the economy. Domestic growth is quite solid.”
Since the last shutdown in October 2013, an additional 5.24 million people are working and the cost of a gallon of gasoline has dropped by about $1, or 30 percent. An improving labor market and cheaper fuel will go a long way toward shielding consumer spending, which accounts for almost 70 percent of the economy.
Any shutdown this year could cut about 0.2 percentage point from growth for each week it lasts, mainly due to the lost production from furloughed federal workers, estimates Alec Phillips, a Washington-based economist at Goldman Sachs Group Inc. He also accounted for reduced government spending, delayed orders for procurement of goods and services, and a shock to business and consumer confidence.
Still, a shutdown this year would probably be shorter than the 16-day partial closure that occurred in 2013, and much of the impact would be reversed the following quarter, Phillips said.
Nariman Behravesh, chief economist for IHS Inc., and the top GDP forecaster according to data compiled by Bloomberg, projects a shutdown would end quickly and reduce growth by about 0.1 percentage point per week. He too predicts most of the loss will be recouped at the start of 2016.
“If it plays out as it did last time, it’s basically no big deal,” said Behravesh, who is based in Lexington, Massachusetts. “The economy is on fairly solid footing and should be able to withstand a government shutdown without too much difficulty.”
In 2013, the expansion kept chugging along. Economic growth picked up to 3.8 percent at an annual pace in that year’s fourth quarter from 3 percent in the prior three months. Payrolls climbed by 317,000 in November, the month after the shutdown, the biggest gain of the year.
One place the fallout may be more visible is consumer confidence. It slumped during the 2011 budget battle and took time to recover. In 2013, the decline was shallower and then spirits quickly rebounded. This time, the damage will probably be even smaller, according to Richard Curtin, director of the Michigan Survey of Consumers.
Households will react “perhaps not as strongly as the last time” because they understand “the world didn’t end,” Curtin said earlier this month on a Bloomberg conference call following the group’s preliminary sentiment reading for September.
That report showed confidence declined this month to the lowest level in a year as Americans anticipated a weaker economy in the face of a global slowdown and turbulent financial markets.
Such fragility, even before the possibility of a shutdown takes center stage, is one concern for Scott Brown, chief economist at Raymond James Financial Inc. in St. Petersburg, Florida. He expects the political bickering may worsen the uncertainty investors are already facing.
“You start rattling the cage here and people could get even more skittish,” Brown said. Even so, “financial markets would be more susceptible than the economy.”
This turbulence is on the Federal Reserve’s radar after policy makers voted last week to keep interest rates near zero, citing international headwinds and financial-market turmoil.
While Fed Chair Janet Yellen said on Sept. 17 that the possibility of a shutdown played “absolutely no role” in their decision to delay the first rate hike since 2006, she warned politicians against endangering the progress the economy has made.
As most analysts wave off the economic impact nationally, the concern is very real for businesses in Washington that largely cater to government employees.
Melvin Davis, manager of Firehook Bakery across from the Labor Department, said he’s “hoping it doesn’t happen again,” recalling how sales plummeted when federal workers stayed home for more than two weeks in 2013.
“We can’t afford it, we can’t take it,” said Davis. “It affects our employees too, as they don’t get the hours. It’s like a domino effect. We all need each other and we need the federal government.”
In the end, corporate America will be largely impervious to a shutdown, as will consumers, said Russell Price, senior economist at Ameriprise Financial Inc. The vast majority “won’t pay much attention,” said Price, who’s based in Detroit. “For better or worse, people are used to it.”
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