A single security guard patrols the closed Lincoln Memorial in Washington. Photo: AFP
Containers of goods idling at ports. Reduced sales at sandwich shops in downtown Washington. Cancelled vacations to national parks and to destinations abroad. Reduced corporate earnings forecasts. Higher interest payments on short-term debt.
Even with the shutdown of the United States government and the threat of a default coming to an end, the cost of Congress’s gridlock has already run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another deadlock early next year.
A complete accounting will take months once the government reopens and the Treasury resumes adding to the country’s debt. But economists said that the intransigence of House Republicans would take a bite out of fourth-quarter growth, which will affect employment, business earnings and borrowing costs. The ripple from Washington will be felt around the globe.
“We saw huge effects during the summer of 2011, with consumer confidence hitting a 31-year low in August and third-quarter GDP growing just 1.4 per cent,” said Beth Ann Bovino, chief United States economist at Standard & Poor’s, referring to earlier brinkmanship over the debt ceiling. “Given that this round of debt ceiling negotiations” took place during a shutdown, she said, “the impact on the economy could be even more severe.”
Economists say the shutdown and near breach of the debt ceiling would be unlikely to derail the recovery, now that Congress resolved the impasse late Wednesday. In the weeks after the government reopens, there should be a modest rebound as employees spend their paychecks for the days they were on furlough and the government rushes to process backlogged orders.
Still, many businesses might not recover all the money they would have made had the government operated normally, said Shai Akabas of the Bipartisan Policy Center, a research group based in Washington.
The two-week shutdown has trimmed about 0.3 percentage point from fourth-quarter growth, or about $US12 billion ($12.6 billion), the forecasting firm Macroeconomic Advisers, based in St. Louis, recently estimated.
Standard & Poor’s is more pessimistic, estimating that the shutdown will cut about 0.6 per cent off inflation-adjusted gross domestic product, equivalent to $US24 billion. Most analysts are predicting that growth will remain subpar, at an annual pace of 2 per cent or less.
Moreover, this latest budget impasse came after years of similar episodes, and the economic ramifications have accumulated over time, analysts say. A new report from Macroeconomic Advisers, prepared for the Peter G. Peterson Foundation, estimates the costs of the fiscal uncertainty of the last few years.
Its model suggests that uncertainty since late 2009 has increased certain corporate borrowing costs by 0.38 percentage point; lowered economic growth over that period by 0.3 per cent a year, costing at least $US150 billion in lost output; and left this year’s unemployment rate higher by 0.6 percentage point. That translates to 900,000 jobs lost.
The unusually rapid pace of deficit reduction, concentrated on goods and services the government delivers, has had a further damping effect on growth, swamping the cost of the relatively brief shutdown, economists said. Macroeconomic Advisers estimated the impact at about 0.7 percentage points of GDP a year, equivalent to over $US300 billion in lost output over the last three years. Additional cuts would slow the economy even more, economists say.
“We are baffled by the idea that the pace of deficit reduction needs to be increased, given how rapidly the picture is improving already,” Ian Shepherdson, the chief economist of Pantheon Macroeconomics, wrote in a note to clients.
The 16-day shutdown itself has already led to the biggest plunge in consumer confidence since the collapse of Lehman Brothers in 2008. Howard R. Levine, the chief executive of Family Dollar Stores, said his customers, most with modest incomes, had pulled back on spending this month.
“The threat of the shutdown, the uncertainty regarding some of the government assistance that our consumers receive, the uncertainty around job growth are very real to our customer every day,” Mr Levine said.
The gridlock also had ripple effects on many industries that rely on the federal government in one way or another. Import inspections, export financing and the issuance of oil and gas permits all slowed.
Residential real estate, which has been one of the brightest points of the recovery, suffered. An index of sentiment among home builders fell in October from a month earlier, according to data released on Wednesday from the National Association of Home Builders.
The decline was greater than analysts had expected. One cause for the decline is that the approval process for government-backed mortgages has slowed with the shutdown.
The damage to business has been intensified by the timing of the shutdown. “We’re in budget planning for 2014, so it casts a pall,” said John Selldorff, who runs the American operations of Legrand, a global manufacturer of electrical and data products based in France. “We are definitely pausing and being more careful.”
The impasse over the debt ceiling raised the United States’ short-term borrowing costs, with investors demanding triple the interest payments they received just a few weeks ago, in some cases. Concerns about the United States as a borrower may have a much longer and deeper effect than the shutdown, analysts say.
“Even with a deal to avoid a default, the damage has been done by the fact that we have had a debate questioning whether the US will pay back its debt,” Laurence D. Fink, the chief executive of the money manager BlackRock, said Wednesday morning. That means higher borrowing costs in the United States and elsewhere.
While this fiscal impasse may be ending , many on Wall Street fear that Washington is not done.
“Then we can come back some time in December, January and February,” said Brian Gardner of Keefe, Bruyette & Woods, a New York investment bank, “and do this all over again.”
The New York Times