Shutdown harms economy; how much depends on how long

McClatchy Washington BureauOctober 1, 2013 

— The partial shutdown of the government threatens self-inflicted harm to an anemic U.S. economy.

How much harm depends on how long the shutdown lasts and whether the bruising political battle extends to the government’s debt ceiling, which needs to be lifted to avoid a default on paying creditors.

Government hiring, procurement and spending have always played important roles in the measurement of U.S. economic growth, so it follows that a halt to government operations will have a measurable impact. If the shutdown lasts a week, it could amount to about $1.6 billion in lost economic activity, according to a report Tuesday from economic forecaster IHS Global Insight.

That’s based on lessons from the 1995 government shutdown, where 36 percent of the 2.20 million federal civilian non-postal workers were furloughed. Using that gauge for the current 2.15 million federal non-postal workers, about 774,000 workers would be furloughed and lose their wages, at least temporarily.“It is difficult to assess the overall impact of either a government shutdown or the failure to increase the debt ceiling, although we fear the impact of the latter far more,” cautioned the report from the company’s top U.S. economists.

President Barack Obama didn’t miss a chance to hit this theme, citing threats to the economy during a White House speech celebrating the start of key provisions in the Affordable Care Act, dubbed Obamacare.

“We know that the last time Republicans shut down the government in 1996, it hurt our economy. And unlike 1996, our economy is still recovering from the worst recession in generations,” Obama said.

As long as the shutdown is brief, the economic consequences on production and financial markets will be “modest,” said forecaster Macroeconomic Advisers.

In a Sept. 25 report, the respected group projected a hit to economic growth in the period between October and December of three-tenths of a percentage point. But a longer shutdown, the report warned, “would cause larger, escalating disruptions” that hurt growth and spark volatility in financial markets.

Back in 1995, furloughed government employees were paid for time off when they returned to work. But given the budget-cutting mood in some parts of Congress, it’s not guaranteed this time.

That worried Robert Wright, a U.S. Census Bureau employee since 1989, who was in a crowd of noisy protestors in front of the agency in Suitland, Md., demanding that Congress fund the government and get federal employees back on the job.

“People aren’t going to have the money to spend, so it’s going to be detrimental on the economy,” said Wright, who lived through the shutdowns of 1995 and 1996 when a Republican-led House of Representatives lost a high-stakes game of political chicken with President Bill Clinton. “I just called my creditors (back then) and told them that I was furloughed, you can’t get it out of me, can’t get blood out of a rock.”

Many federal workers live and work in the Maryland and Virginia suburbs, where many agencies are located. These states will be among the hardest hit by the government shutdown. Maryland Democratic Gov. Martin O’Malley estimated Tuesday that his state will lose $5 million a day in lost income-tax and sales-tax revenue during the shutdown, $15 million a day in lost economic activity if the shutdown lasts two weeks.

One hit could come Saturday. The Defense Department postponed, for the period of the government shutdown, all scheduled collegiate athletic events involving military academies. It meant that if government is closed this weekend, the annual Army-Navy football game, scheduled to be played at the Naval Academy’s stadium in the Maryland capital of Annapolis, would be postponed. The popular rivalry was scheduled to be broadcast on national television.

Virginia is the state with the most revenue from defense contracting. Republican Gov. Bob McDonnell offered no relevant information during working hours Tuesday on his website about economic harm to his state from the shutdown. It said the governor had no public events planned, but featured a news release and tweet touting the record number of good air quality days over the summer.

“We don’t have numbers on the economic impact of the shutdown like Maryland does,” said Taylor Keeney, a spokeswoman for Gov. McDonnell.

The stock market didn’t seem overly concerned about the government shutdown, with all three major indices closing up Tuesday, lifted partly by an unexpectedly strong reading of the ISM Manufacturing Survey.

“Going into the latest self-inflicted U.S. fiscal crisis, manufacturing activity appeared to be recovering from the early-2013 double-barreled fiscal tightening,” Alan Levenson, chief economist for investment giant T. Rowe Price Associates, wrote in a note to investors, referencing this year’s payroll tax hikes and steep budget cuts. “The impact of a prolonged shutdown (potentially bleeding into a face-off over the debt limit with a 10/17 due date) remains to be seen.”

The Dow Jones industrial average closed up 62.03 points to 15,191.70, the S&P 500 gained 13.45 points to 1,600.00 and the NASDAQ finished 46.50 points up to 3817.98.

Email: khall@mcclatchydc.com; Twitter: @KevinGHall

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