Federal Shutdown for a Week Seen Shaving 0.1 Point From Growth

A partial shutdown of the U.S. government lasting one week would probably shave 0.1 percentage point from economic growth, according to the median estimate of economists, with the costs accelerating if the closing persists.

Estimates of the setback to gross domestic product ranged from zero to 0.4 percentage point, according to 40 economists in a Bloomberg survey. The U.S. government yesterday began its first partial shutdown in 17 years as Republicans and Democrats clashed over whether to tie any changes to the 2010 Affordable Care Act to a short-term extension of government funding.

“The impact on the broader economy does start to kick in as the shutdown extends beyond a week, two weeks,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, whose estimate matched the survey median. “If it’s a couple of days or even a week it’s something that we’ll have forgotten about a month or two from now.”

The closing has furloughed almost 800,000 employees as offices, parks and museums closed. It may cost the U.S. at least $300 million per day in lost output at first, according to IHS Inc., which estimates annualized growth in the fourth quarter will be reduced 0.16 percentage point in a weeklong closing.

Beyond a week, the costs from a shutdown to the $15.7 trillion economy would speed up amid declining confidence and spending among consumers and businesses, according to Guy Lebas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.

Stanley Estimates

Stanley estimated a two-week closing would probably set back GDP by 0.2 percentage point, while a monthlong suspension would cost 0.5 percentage point.

“If the shutdown stretches on to a week or more, consumer confidence, equity markets and the increased likelihood of default could knock as much as 0.2 percentage points or more off the annualized pace of quarter four GDP,” Yelena Shulyatyeva, a U.S. economist at BNP Paribas in New York, said in an e-mail.

The government suspension has done little so far to dent confidence in markets.

The Bloomberg U.S. Financial Conditions Index rose yesterday for the first time in seven days, increasing 0.17 to 1.34. The gauge measures stress in the markets by combining everything from money-market rates to yields on government and corporate bonds to volatility in equities. During the debt-ceiling debate of August 2011, the index fell as low as negative 1.631.

Treasury Yield

The yield on the benchmark 10-year U.S. Treasury note increased 4 basis points, or 0.04 percentage point, to 2.65 percent in New York, according to Bloomberg Bond Trader prices. The yield is down from the high this year of 3 percent on Sept. 6 and compares with the average of 3.52 percent over the past decade.

The U.S. budget deficit in June was 4.3 percent of GDP, down from 10.1 percent in February 2010 and the narrowest since November 2008, when President Barack Obama was elected to his first term, according to data compiled by Bloomberg from the Treasury Department and the Bureau of Economic Analysis.

Obama yesterday blamed House Republicans for closing government operations as part of an “ideological crusade” against his health-care law.

“One faction of one party, in one house of Congress, in one branch of government shut down major parts of the government all because they didn’t like one law,” the president said at the White House. “It’s all about rolling back the Affordable Care Act.”

The shutdown could cost the economy as much as $10 billion a week, the White House said on its website, while not explaining how it arrived at the estimate.

McConnell Comment

Senate Minority Leader Mitch McConnell of Kentucky said yesterday that Democrats “seem completely opposed to negotiation or compromise” on Obamacare, even at the cost of a shutdown.

While the shutdown will probably be “relatively brief,” the harm to consumer confidence “will likely multiply as the shutdown proceeds, weighing on spending, and thereby on real economic recovery as a whole,” Gennadiy Goldberg, a U.S. strategist at TD Securities USA LLC in New York, said in a note to clients.

TD Securities projected a 0.15 percentage point GDP reduction from a one-week closing, based on the survey.

Business confidence and private-sector hiring may fall if the suspension in government operations combines with doubt that lawmakers can agree on raising the nation’s debt limit, said Guy Berger, an economist at RBS Securities Inc. in Stamford, Connecticut.

Borrowing Ability

The U.S. Treasury has said its ability to borrow will end on about Oct. 17 unless the $16.7 trillion debt ceiling is increased. Treasury Secretary Jacob J. Lew has said that failing to raise the limit would risk putting the U.S. into default and could be “catastrophic.”

“The worst case is basically what we saw in summer 2011, with the last debt-ceiling crisis,” Berger said. “It really did have noticeable effect on economic activity, and it took a while to creep back.”

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