Economic Impact of US Govt shutdown

Posted by Admin On Wednesday, 2 October 2013 0 comments
On Monday, US President Barack Obama said that “a shutdown will have a very real economic impact on real people, right away”.
But what exactly will that economic impact be?
The last time the US government shut down in 1995, it cost the federal government $1.5bn (£927m) – that’s $2.1bn (£1.3bn) in today’s dollars.
Goldman Sachs estimates a three-week shutdown could shave as much as 0.9% from US GDP this quarter.
However, markets, while down for the week – have not plummeted and, overall, are still up significantly for the year.
For now, it seems, the business community is focused on other concerns, like when the Federal Reserve will begin to ease off its extraordinary efforts to prop up the US economy – something the central bank says will not happen any time soon, partially due to Washington dysfunction.
Not economic barometer
“They’re going to eventually get to a compromise and then we’ll move on,” O’Neil Securities trader Kenny Polcari told the BBC from the floor of the New York Stock Exchange.
A veteran trader, Mr Polcari was also at the NYSE during the last government shutdown, from 1995-1996.
Back then, he remembers, markets sold off but then actually rebounded.
“A government shutdown is not necessarily a comment on the state of the US economy,” says Mr Polcari.
I don’t believe that the people who run private companies wake up every morning and worry very much about what’s happening in Washington ”
Brian HamiltonSageworks
“All indications are that they US economy is starting to turn a corner.”
In fact, for traders like him, he says now might actually be a good time to get into the market, before third quarter earnings next week.
“This is in hindsight will probably be viewed as a good buying opportunity, as long as you don’t get real panicked,” says Mr Polcari.
“I don’t expect to get panicked.”
‘A little numb’
And, for many businesses, another debt squabble in Washington is just background noise during a time of good, if not great, economic growth.
“The difference between now and a couple years ago was that a couple years ago we were coming out the depths of a recession,” says David Zarin, who owns a fabric store on Manhattan’s Lower East Side.
During the debt ceiling negotiations of 2011, he says he saw his business decline in the wake of so much uncertainty at a fragile time of the US economy recovery.
Now, while business isn’t as a robust as it was prior to the crisis, he’s no longer as sensitive to what he calls “Washington posturing.”
David Zarin says he’s not worried about the impact of the shutdown on his business
“Frankly, I’m a little numb,” he says.
Brian Hamilton, boss of Sageworks, a market research company, says Mr Zarin’s views are common throughout the private business community.
“There’s sort of an assumption that what happens in Washington looms large on the minds of people who run private companies,” says Mr Hamilton.
“Not to be flip about it, but I don’t believe that the people who run private companies wake up every morning and worry very much about what’s happening in Washington unless it affects their bottom lines.”
Economic tsunami
But for one place, the economic impact of the shutdown will be felt immediately.
According to George Mason University professor George Fuller, the Washington DC area will lose an estimated $220m a day while federal workers and contractors are furloughed, perhaps not spending money at local restaurants and businesses.
The federal government accounts for one-third of the region’s economy.
“If it’s a one day event, it’s like a snow day, if its three days it’s a blizzard – but if it’s more than that, it’s a big deal,” says Prof Fuller.
Shadow people and statue of liberty
Tourism revenue would decline as US federal parks close during a shutdown
Furthermore, uncertainty is never good for hiring.
One-half of bosses surveyed by the Business Roundtable “indicated that the ongoing disagreement in Washington over the 2014 budget and debt ceiling is having a negative impact on their plans for hiring additional employees over the next six months”.
And global markets, always keen to see how the world’s largest economy is faring, will certainly have cause to pause.
If the shutdown continues until Friday, the release of crucial US jobs figures could be delayed.
There will be a violent reaction in financial markets if policymakers fail to act in time”
Mark ZandiMoody’s Analytics
“All survey and other programme operations will cease and the public website will not be updated,” said Erica Groshen, commissioner of the Bureau of Labor Statistics, said in a memo published on the department’s website.
However, some reports suggest that the jobs figures would be deemed “essential” and would end up being released on time.
A prolonged closure could also have an impact on the biggest stock market news of the year: Twitter, the social networking company, has indicated that it would like to make its stock market debut soon, filing the proper paperwork with the Securities and Exchange Commission.
The SEC says it has funds to stay open for a few weeks, but a prolonged shutdown could force the agency to delay reviewing public offering applications.
Gripping dysfunction
But for now, at least, traders and economists have painted the shutdown as a wait-and-see moment – but something with a bit of popcorn value, like must-see TV.
“Investors have been riveted on still another gripping episode of fiscal policy dysfunction in a divided US government,” wrote UBS’s chief US economist Maury Harris in a note to clients.
Mr Harris notes that indications that Washington dysfunction could spill over into wider economic impacts have been muted, with consumer confidence surveys still pointing towards a positive US public.
And the main worry continues to be what happens, if, in a few weeks time, politicians cannot agree on raising the limit the US can borrow so that the country can pay its creditors.
“Any delay in raising the debt ceiling would have dire economic consequences,” said Moody’s chief US economist Mark Zandi in recent testimony in front of Congress.
“There will be a violent reaction in financial markets if policymakers fail to act in time,” he warned.
US debt chart
By Kim Gittleson


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