Shutdown Will Cost U.S. Economy $300 Million a Day, IHS Says

By Jeanna Smialek & Ian Katz - Oct 1, 2013 6:36 AM PT

A partial shutdown of the federal government will cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc.

While that is a small fraction of the country’s $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues as it depresses confidence and spending by businesses and consumers.
Lexington, Massachusetts-based IHS, a global market research firm, estimates that its forecast for 2.2 percent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.
“Government spending touches every aspect of the economy, and disruption of spending, more than the direct loss of income, threatens to damage investor and business confidence in ways that can seriously harm economic growth,” LeBas said yesterday in an interview.
The Fed on Sept. 18 unexpectedly refrained from reducing the $85 billion pace of bond purchases intended to boost growth, saying it needs more time to assess the economy’s progress. Federal Reserve Bank of New York President William C. Dudley said last week the budget showdown in Washington is among the risks to the outlook.

Funding Extension

The U.S. government began its first partial shutdown in 17 years today as Republicans and Democrats remained at odds over whether to tie any changes to the 2010 Affordable Care Act to a short-term extension of government funding.
Failing to fund government operations “would throw a wrench into the gears of our economy,” President Barack Obama said yesterday at the White House. “The idea of putting the American people’s hard-earned progress at risk is the height of irresponsibility, and it doesn’t have to happen.”
U.S. stocks fluctuated, after the Standard & Poor’s 500 Index fell to a three-week low, as investors weighed the economic effects of the shutdown. The S&P 500 rose 0.4 percent to 1,689.46 at 10:21 a.m. in New York. The yield on the 10-year Treasury note increased 2 basis points, or 0.02 percentage point, to 2.63 percent.

Furloughed Workers

A shutdown will initially slow the expansion because output lost when workers are furloughed subtracts from gross domestic product. Economists estimate that 800,000 to 1 million of the more than 2 million civilian government workers would be furloughed.
While federal employees were repaid after the 1995-1996 furlough, a longer shutdown may prompt them to start paring their spending.
“Each day the shutdown drags on, the more federal employees will discount the possibility that they won’t get back to work anytime soon, and they will pull back on their spending,” Mark Zandi, chief economist at Moody’s Analytics Inc., said in an e-mail.
Teresa Johnson, who works for the Transportation Security Administration, was already concerned yesterday.
“The shutdown affects me greatly.” said Johnson, 47, who was getting lunch at Pentagon City, a mall in Arlington, Virginia. “I have a mortgage, and I’m the sole provider for my two daughters, one of whom is in college.”

Consumer Confidence

If a shutdown drags on, it would start to shake consumer and business confidence more broadly, economists said. Household spending accounts for 70 percent of the economy.
Bank of America Merrill Corp. projects that a two-week closing would curb fourth-quarter growth by 0.5 percentage point, while closing for all of October would shave 2 percentage points from GDP, Ethan Harris, co-head of global economics research, wrote in a note to clients.
A shutdown will probably add to the budget deficit because it “is costly to stop and start programs,” Harris wrote.
Congress and the White House also will face off over raising the nation’s $16.7 trillion debt ceiling. The Treasury has said its ability to borrow will end on about Oct. 17 unless the limit 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 longer the shutdown, the more damage will accrue to business and consumer confidence,” Eric Green, New York-based global head of foreign exchange, rates and commodities at TD Securities USA LLC, wrote in a note. “A longer shutdown stretching into mid-October, when the Treasury estimated that the debt ceiling will need to be raised, would likely magnify the hit to economic activity by raising the risk of a bad outcome on the debt ceiling.”