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Long Government Shutdown Would Harm U.S. Economy, Hit Washington Hardest

An extended U.S. government shutdown would cause increasing harm to the nation’s economy, with the Washington area -- home to about 350,000 federal workers -- bearing the brunt of the damage.

“The economic damage would mount pretty quickly,” in a two- or three-week shutdown, said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “The longer this drags on, the greater the odds it undermines confidence more broadly.”

The direct costs of lost income to federal workers and contractors would be about $6 billion a week, said Zandi. “The dollars and cents would start to add up.”

Congressional leaders remain stalemated over funding the U.S. government, with President Barack Obama unable to broker a compromise after several White House meetings -- the most recent one last night -- with House Speaker John Boehner, an Ohio Republican, and Senate Majority Leader Harry Reid, a Nevada Democrat. The lawmakers’ staffs were continuing negotiations into the night.

In brief remarks after last night’s session with Boehner and Reid, Obama said that a shutdown could severely hamper the economic recovery and job growth.

“We’ve been working very hard over the last two years to get this economy back on its feet,” he said. “For us to go backwards because Washington couldn’t get its act together is unacceptable.”

Midnight Deadline

Failure to reach a deal on funding for the remaining six months of the fiscal year would trigger a government shutdown at midnight tonight, causing more than 800,000 “non-essential” federal workers to be furloughed without pay.

Among services that would be halted are some mortgage processing by the Federal Housing Administration and loan approvals by the Small Business Administration, while some tax refunds would be delayed. Air traffic control, emergency management and federal law enforcement would continue.

Lockheed Martin Corp. (LMT), the world’s largest defense contractor, said it would keep its factories open and pay its employees’ salaries and benefits.

“We have no plans to furlough anyone,” Chairman and Chief Executive Officer Bob Stevens said yesterday in a memo to employees that was posted on the Bethesda, Maryland-based company’s website. The company employs about 132,000 people and has operations in 500 cities in the U.S., according to its website.

A shutdown lasting two or three days would cause little economic disruption.

“You’ve got a short-term impact that is likely to be relatively minor, but it really does depend obviously on how long it goes,” said Joel Naroff, president of Naroff Economic Advisors in Holland, Pennsylvania.

Stocks Fall

Still, concern that an impasse over the federal budget may lead to a shutdown helped push down stocks yesterday. The Dow Jones Industrial Average slipped 17.26 points, or 0.1 percent, to 12,409.49 at 4 p.m. in New York, and the Standard & Poor’s 500 Index dropped 0.2 percent.

The Securities and Exchange Commission said an “extremely limited” number of staff would be available to respond to emergency situations, according to the agency’s website. The SEC would be unable to process or review filings, provide interpretive advice or issue no-action letters, it said.

Hardest hit of all local economies would be the Washington area, which fared better than other cities during the recession because of government employment.

‘Tethered at the Hip’

It “will get hammered if this drags on for more than a few days,” Zandi said. “The city’s economy is tethered at the hip with the federal government.”

With museums and the National Zoo shuttered, tourism dollars would decline.

Representative Jim Moran, a Virginia Democrat whose district lies just outside the capital, is advising constituents who work for the government to hold onto their cash, warning that a shutdown may stretch into next week.

With so much concern over the U.S. deficit, it will be difficult for lawmakers to approve legislation providing back pay once the impasse is resolved, he said.

“They’re going to have to conserve their money to make their mortgage and car payments,” Moran said. ‘They’re going to have to determine what are the essentials.’’

He estimated that 100,000 federal workers in the Washington area could be furloughed.

Government employees who live in Northern Virginia will see paychecks halted and federal contractors may be forced to furlough workers, hurting small businesses, he said.

Business Confidence Concerns

On a national scale, a big concern is the potential that a shutdown would further erode business confidence “at a time when a lot of companies and investors have inventory and cash that could help accelerate the recovery,” said Mike McNamara, a former Commerce Department economist who is now a partner specializing in public policy at SNR Denton law firm in Washington.

The international community also will “look at this and say ‘What’s happening in the United States?’” he said.

The Business Roundtable, a Washington-based association representing corporations, said in a statement that “a shutdown would have negative and unforeseen consequences, including heightening uncertainty and disrupting basic business services to government agencies.”

Debt Ceiling

One potential bright spot: A shutdown over this year’s budget may avert one later over a more contentious debate, as early as May, over raising the nation’s debt ceiling, both McNamara and Zandi said.

“There is a school of thought that if you do have a shutdown, and everyone can win what they need to win and lose what they are going to lose, you may pave the way for a more favorable debate and outcome on the debt ceiling,” McNamara said.

A closing of the federal government would come during the week of the Labor Department’s employment survey period, when the agency canvasses businesses and households to calculate this month’s payroll and jobless figures.

The unemployment rate wouldn’t be affected, said John Herrmann, senior fixed-income economist at State Street Global Markets LLC in Boston.

A household survey is used to calculate the jobless rate. The odds of contacting a significant enough number of the 800,000 furloughed workers to influence the rate are slim. Even if reached, most of those employees would probably say they had a job.

Effect on Payrolls

The influence on payrolls, a separate survey of employers, would be more difficult to predict and would depend on the length of furloughs, Herrmann said.

Elected officials, including Boehner, Reid and Obama, all would be paid during a shutdown, unless Congress changes the law. Soldiers, law enforcement officers and other government employees whose jobs are deemed “essential” would keep working yet wouldn’t get paychecks until the standoff is resolved.

There is no guarantee, though, that workers furloughed as “non-essential” will be paid at all for time off when the government closes for business.

The Senate has passed a measure to dock the pay of lawmakers for the duration of a shutdown. A House measure, part of the largely symbolic Prevention of Government Shutdown Act approved last week, would dock the pay of the president in addition to members of Congress. Neither proposal has taken effect.

‘Pretty Heavy Blow’

Illinois Republican Representative Bobby Schilling, a freshman, said a government shutdown would deal “a pretty heavy blow” economically to his congressional district, which includes the U.S. Army’s Rock Island Arsenal.

“We have a large contingent of arsenal folks,” he said.

The arsenal is the largest employer in Rock Island County, part of the Quad Cities area of western Illinois and eastern Iowa, Schilling said.

The arsenal, which makes armor kits for the Army’s Humvee vehicles and the carriage for the M-109 Howitzer artillery cannon, employs more than 6,000 civilian government workers, said spokesman Eric Cramer. It provides work for an additional 1,326 employees of private contractors, he said.

“I don’t think a shutdown would be good for the American people whatsoever, not only in my district” but for “the men and women across the country,” Schilling said.

To contact the reporters on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net; Julianna Goldman in Washington at jgoldman6@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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