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

Back Pay

Spending by government workers is unlikely to be affected because they will expect to receive back pay after returning to work, according to Macroeconomic Advisers.

A shutdown of just a few days would have little impact on the economy, analysts say. On the other hand, a closure of more than two months would “likely precipitate another recession,” Zandi, chief economist at Moody’s Analytics, said Sept. 24 in testimony to the Senate Budget Committee. Even a three- or four- week gap would “do significant economic damage.”

Haggling over a continuing resolution to fund the government past the end of the month comes as House Republican leaders prepare for what Speaker John Boehner last month called a “whale of a fight” over the nation’s $16.7 trillion debt limit.

Winning Support

The leaders are banking on winning public support for a strategy of pairing their goals of spending cuts, looser environmental regulations and an Obamacare delay with the increase in the debt cap, rather than using the possibility of a government shutdown as leverage to win their objectives.

A quick agreement on a continuing resolution might bode well for talks on raising the debt ceiling, said Millan Mulraine, director of U.S. rates research at TD Securities USA LLC in New York.

“The initial cue for markets will come from how easily we are able to resolve the discussion on the government shutdown,” Mulraine said.

Treasury Secretary Jacob J. Lew said this week the government probably would exhaust extraordinary measures it has been using to keep under the debt ceiling no later than Oct. 17 and will have about $30 billion cash on hand. That’s down from a projection of $50 billion last month.

The U.S. was stripped of its AAA credit ranking by Standard & Poor’s in August 2011, a move that partly reflected an impasse in Congress over raising the debt ceiling as well as the government’s lack of a plan to rein in its debt load.

While the downgrade didn’t result in investors charging the U.S. more to borrow, as 10-year Treasury yields slipped to record lows in July 2012, the move contributed to a global stock-market rout that erased about $6 trillion in value from July 26 to Aug. 12, 2011.

“A shutdown of non-essential services is inconvenient for a while. If we hit the debt ceiling, we’re in unchartered territory,” Prakken said. “If you miss an interest payment on the national debt, that’s a sovereign default of sorts, and I think it would shake the foundations of the global financial system.”

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