Shutdown seen cutting U.S. growth 0.2 percentage point

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., 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% 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.

Diminishing Impact

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% rate in the fourth quarter. The September survey was for 2.5%.

“Right now, we’re looking at another quarter of below- potential growth,” said Stefane Marion, chief economist and strategist at National Bank of Canada Financial Inc. in Montreal. Reduced growth “makes the difference between stabilizing the unemployment rate or having a rate that might drift higher.”

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