Shutdown Could Reduce U.S. Growth By 0.2 Point This Week
A partial federal government shutdown lasting through the end of this week would pare 0.2 percentage point from U.S. economic growth and cost as much as 0.5 point if it continues another two weeks, according to the median estimate in a Bloomberg survey of economists.
Estimates of gross domestic product losses in the fourth quarter if the shutdown ends this week range from zero to 0.6 on an annualized basis, according to a Bloomberg survey of 45 economists taken Oct. 4-9. The U.S. government began its first partial shutdown in 17 years Oct. 1 as Republicans and Democrats clashed over passing a budget.
“The main impact on GDP comes from the government sector itself,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut. “My guess is the ripple effects are modest early on, but if the government were to stay shut down for as long as a month, you would see issues developing in the private sector.”
Companies reliant on federal procurement spending, such as Lockheed Martin Corp. (LMT), the top federal contractor, have already furloughed workers because of the shutdown. Having initially planned to send 3,000 people home, the company reduced the number by about 20 percent Oct. 7 after the Defense Department said most of its idled employees would be called back to work.
For many furloughed federal employees, the paychecks they receive tomorrow may be half their usual amount, and the last ones for a while.
The effects of a shutdown could diminish with time as Americans pressure the government into recalling more workers, said Mike Englund, chief economist at Action Economics LLC in Boulder, Colorado.
“As we keep passing patches, the size becomes smaller and smaller, and the effects diminish,” Englund said.
Even so, the cumulative effect would continue to build the longer the shutdown continues, according to projections in the Bloomberg survey.
Economists expected a 0.1 percentage point cost after one week of shutdown, based on an Oct. 1 Bloomberg survey. The median estimate of GDP loss from a shutdown lasting through Oct. 18 was a 0.3 percentage point reduction, this week’s poll shows, climbing to half a point if the shutdown persists through the end of the following week.
The median estimate of 68 economists in a separate survey forecast annualized growth at a 2.4 percent rate in the fourth quarter. The September survey was for 2.5 percent.
“Right now, we’re looking at another quarter of below-potential growth,” said Stefane Marion, chief economist and strategist at National Bank of Canada (NA) Financial Inc. in Montreal. Reduced growth “makes the difference between stabilizing the unemployment rate or having a rate that might drift higher.”
Economists also cut their forecasts for the third quarter and the first quarter of 2014. The median for the third quarter was lowered to 1.9 percent from 2 percent in the September survey, and the median for the first three months of 2014 was down to 2.6 percent from 2.7 percent.
Initial jobless claims climbed to 374,000 last week from 308,000 the prior week, Labor Department data showed today. The surge was the most since in the aftermath of Superstorm Sandy in November 2012.
The jump came as California worked through a claims backlog caused by a computer system switch and as non-federal employees were forced to take time off because the shutdown, a Labor Department spokesman said.
Federal Reserve policy makers said after their Sept. 17-18 meeting that they will wait to taper $85 billion in monthly asset purchases until they see more evidence of steady growth to reduce the 7.3 percent unemployment rate. Minutes from the meeting, released this week, show Fed officials who favored maintaining the pace of purchases cited concerns partly from “considerable risks surrounding fiscal policy.”
“Their concerns about a new fiscal shock have materialized and this will probably delay the start of tapering further into” the first quarter, Societe Generale SA economists led by Michel Martinez and Michala Marcussen, wrote in a note to clients today.
Another fiscal battle is playing out: the U.S. Treasury has said its ability to borrow will end on about Oct. 17 unless Congress increases the $16.7 trillion debt ceiling. Treasury Secretary Jacob J. Lew told Congress today that failing to raise the limit would risk putting the U.S. into default and cause “irrevocable damage” to the economy and financial markets.
President Barack Obama said this week that he would accept a short-term debt limit increase and an agreement to end the partial government shutdown and then enter broader fiscal negotiations with Republicans.
“Failing to raise the debt ceiling will impact everyday Americans beyond its impact on financial markets,” Lew told the Senate Finance Committee today. Between Oct. 17 and Nov. 1, the U.S. has “large payments to Medicare providers, Social Security beneficiaries, and veterans, as well as salaries for active-duty members of the military. A failure to raise the debt limit could put timely payment of all of these at risk.”
To contact the editor responsible for this story: Chris Wellisz at firstname.lastname@example.org