Shutdown would shave fourth-quarter U.S. economic growth

A shutdown of the U.S. government would reduce fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, economists say, as government workers from park rangers to telephone receptionists are furloughed.

Mark Zandi of Moody’s Analytics Inc. estimates a three-to-four week shutdown would cut growth by 1.4 points. Zandi projects a 2.5% annualized pace of fourth-quarter growth without a shutdown. A two-week shutdown starting Oct. 1 could cut growth by 0.3 percentage point to a 2.3% rate, according to St. Louis-based Macroeconomic Advisers LLC.

A shutdown would slow the expansion because output lost when workers are furloughed subtracts from gross domestic product. The combined prospect of a budget standoff between the White House and Congress and haggling over the debt ceiling could have a bigger impact on the economy as businesses hold off on investment and households delay spending.

“What we have is a political and not economic maelstrom,” said Bernard Baumohl, chief global economist at Economic Outlook Group LLC in Princeton, New Jersey. “What everyone is watching right now is if the uncertainty is affecting consumer and business psychology, that they are postponing spending until they get more clarity about what’s going to happen in Washington.”

Stopgap Spending

The Republican-controlled House has passed a measure that would deny funding for President Barack Obama’s health-care law as part of a bill to pay for government operations after the Sept. 30 end of the fiscal year. The Democratic-controlled Senate will vote today on a stopgap spending bill, which party leaders said will exclude the Republican language ending funds for the law.

A shutdown wouldn’t be unprecedented: 17 funding gaps happened between 1977 and 1996, based on a Congressional Research Service analysis. In 1995 and 1996, interruptions lasted from Nov. 14 to Nov. 19 and from Dec. 16 to Jan. 6, as Republicans led by then-House speaker Newt Gingrich clashed with President Bill Clinton’s administration.

Those back-to-back shutdowns cut GDP by 0.25 percentage point in the fourth quarter of 1995, almost entirely because federal employees were furloughed, according to an analysis by Joel Prakken, senior managing director at Macroeconomic Advisers.

Prakken, in his estimate of the impact on GDP this time, assumes that 36% of the federal government’s 2.1 million civilian employees would be furloughed. Non-essential employees may include park rangers and most workers at the Internal Revenue Service. Zandi, on the other hand, assumes that about half of government employees would be furloughed.

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