Economic damage from the shutdown? Small to start, say forecasters
The U.S. government shutdown probably won’t hit the economy too hard, say economists. Some point to the fact the shutdown has come right at the start of the fourth quarter, meaning there’s time before the year’s out for the economy to recoup some of lost output resulting from the downtime. But, the longer it goes on, the worse it will be.
And there is always that debt-ceiling tail risk – the worst-case scenario being that the U.S. Treasury will default on one or more of its obligations. A Reuters poll on Monday put that risk at less than 10 percent.
Here’s a selection of comments from economists on the impact of the shutdown:
Michael Feroli, chief U.S. economist, JPMorgan:
“We estimate that each week the government is shut down will shave about 0.12 percent off the quarterly annualized growth rate of real GDP. There may be additional knock-on effects through confidence and on into consumer spending which are harder to quantify, though in the last shutdown in 1995-6 these appear to have been minimal. Real consumer spending expanded at a 2.8 percent annual rate in Q4 95 and a 3.8 percent pace in Q1 96.”
John Silvia and Michael Brown, economists at Wells Fargo:
“The estimated economic effects of a short-term federal government shutdown on our current forecast are estimated to be minor. Our expectation is that our fourth quarter GDP call would be reduced by 0.0-0.5 percent in the fourth quarter. There would be negative effects on government spending and reduced consumption from the furloughed workers. Historically, following a government shutdown, the federal government boosts consumption and federal workers payroll is restored.
“The primary reason for the minimal economic impact during this shutdown stems from the fact that most of the negative effects and the subsequent positive bounce back effects are currently expected to be contained within the same quarter of growth. Thus, on net, the overall hit to GDP is not as great as the 1995-1996 shutdown, which spanned two quarters.”
Paul Ashworth, chief US economist, Capital Economics
“A short shutdown, or even one that lasts less than a couple of weeks could end up having only a modest impact on fourth-quarter economic growth. Admittedly, the shutdowns in late 1995 caused Federal spending to contract by 14.2 percent annualized in the fourth quarter, subtracting around 1.0 percent from overall GDP growth.
“But those two shutdowns came right at the end of the quarter, whereas this one is starting on the first day of a new quarter. When the shutdown ends, Federal employees will receive their back pay and, as a result, some of the activity and spending that doesn’t take place at the start of the fourth quarter will still take place before the end of the year.”
Carl Tannenbaum, chief economist, Northern Trust
“Lost wages of furloughed employees and associated ripple effects will bear on economic activity. The impact can vary from a few tenths of headline real gross domestic product growth to something more significant, depending on the duration of the shutdown. In the 1995-96 episode, Congress restored lost pay, which ended up neutralizing the short-term impact.
“The U.S. economy is growing at a muted pace, compared with the strong momentum of 1995. So there is a feeling that the expansion is quite a bit more fragile. In hindsight, the Federal Reserve’s September decision to maintain the current asset purchase program looks better in the current light.”
Vincent Reinhart, chief U.S. economist, Morgan Stanley
“In addition to finger pointing to assign blame, expect a 15 basis point drag on fourth-quarter real GDP growth, at an annual rate, for every week of shutdown as those furloughed workers do not put in their usual hours.”
Alec Phillips, U.S. economist, Goldman Sachs
“We estimate a two-day shutdown would reduce growth in Q4 at an annualized rate by 0.1 percentage points, while a week-long shutdown would be worth -0.3 percentage points. The reasons the effects would not be greater, despite the size of the federal government, are that a) only activities funded by congressional appropriations (so-called “discretionary spending”) are affected; this represents about one-third of total federal spending, b) a little over half of activities within that category of spending are likely to be deemed critical and thus exempt; and c) in the areas that are not exempt, employee salaries would be cancelled during the shutdown, but most other procurement of goods and services would be made up shortly after the shutdown ends.
“The upshot is that as many as 800,000 federal employees would probably not work and would not be paid during the shutdown. For comparison, in July 2013 nearly 700,000 Department of Defense civilian employees were furloughed without pay for 3.5 days as a result of sequestration.”
Donald Ratajczak, consulting economist and professor emeritus at Georgia State
“A short government shutdown will have more political than economic ramifications, though assume a quarter point removal of growth for every week of shutdown. A default could be a financial nightmare and will raise interest costs by $80 billion for every half point increase in interest rates from credit changes. ”
Lena Komileva, chief economist, G+ Economics
“To the extent that government shutdown will sour the political debate on the debt ceiling later this month, there is a higher than 50 percent chance that negotiations will go past the mid-October deadline imposed by the Treasury. Since an increasingly tight timeline will bring the US government perilously close to running out of cash reserves, this will inevitably be noticed by the watchful interests of the international investor community and America’s official creditors such as China.
“As incredulous as US public debt default might sound, on the eve of the 2014 midterm elections and with the Fed printing money to fund the deficit, such a scenario carries a higher than 10 percent probability.”
Guy LeBas, chief fixed income strategist, Janney Montgomery Scott
“A government shutdown lasting two to four weeks could take 1.0 to 1.5 percent off of economic growth in Q4 at a time when the economy is already growing sluggishly. A debt ceiling breach requiring prioritization of payments (e.g., social security) would have a much more severe and almost unpredictable negative economic and market impact.”
Elliot Clarke, economist, Westpac
“While it is hard to believe that either the impasse over the spending authority or a potential follow-up crisis around the debt ceiling would last for weeks, they are still shocks which the US economy can ill afford. As we have highlighted at length, the US economy is in poor health, with growth unable to break above a sub-trend pace.
“We anticipate growth will maintain an annualized growth pace of 1.7 percent in Q4 absent a shutdown, so a delay of more than a few days could see the US economy verge on stalling. Further, the direct and confidence-related impact of a shutdown at this juncture could linger well into 2014.”