4 Key Economic Drivers That the Shutdown Slowed Down

Money

Source: http://www.flickr.com/photos/zieak/

Counting the casualties from October’s Washington political battle could take months. Beth Ann Bovino, an economist at Standard & Poor’s, estimates that the shutdown cost the U.S. economy some $24 billion and cut her forecast for fourth-quarter gross domestic growth from 3 percent to 2.4 percent. Doug Handler, chief economist at IHS Global Insight, followed suit, pinning most of the overall reduction on a shutdown-induced decrease in government and consumer spending.

Complicating the calculation, the damage caused by the 16-day partial shutdown and debt limit brinkmanship is not all behind us — some of it will manifest in the future. The United States’s reputation in the eyes of the world and the approval of both Democrats and Republicans among Americans has cratered, and while a ceasefire was signed in the eleventh hour on Thursday, it is only temporary. The nation is in for another battle shortly after the holidays, when the stopgap measures keeping the government funded and the debt limit suspended expire.

But still, as participants in the economy, we are compelled to try and survey the damage.. Here are some key economic drivers that have faltered over the past few weeks.

1. Consumer Confidence and Spending

For better or for worse, the U.S. is a consumer-driven economy. Consumer spending accounts for as much as two-thirds of economic activity, and the ebb and flow of consumer participation in the economy depends largely on their moods. When headlines spit economic fire and brimstone, and political dysfunction brings the nation’s businesses to a screeching halt, most people quickly become conservative with their personal finances.

Gallup’s Economic Confidence Index plummeted during the October showdown in Washington to levels not seen since Congress last engaged in debt limit brinkmanship in 2011. Self-reported consumer spending data from October is not out yet, but even before the shutdown, spending declined dramatically, from $95 per day to $84 per day in September.

Retail sales as measured by the International Council of Shopping Centers and Goldman Sachs fell 0.7 percent for the week ended October 7. The decline followed a 0.1 percent decline in the week ended October 5, a 0.2 percent increase in the week ended September 28, and a 1 percent decrease in the week ended September 21.

2. Housing Market

Just as confidence in the economy is necessary for the all-important consumer sector, confidence among home builders is an important part of the housing market. And although the housing market was at the heart of the late-2000s financial crisis, home builders have generally surfed a wave of increased sales and prices in the wake of the collapse.

However, after climbing higher for four consecutive months earlier this year, the National Association of Home Builders/Wells Fargo’s index of builder confidence declined to 55 in October, compared to 57 in the previous month. The reading was below expectations of 57. Any reading above 50 indicates that more builders view sales conditions as good, rather than poor. In the five years before the Great Recession, the index averaged 54 and hit an all-time low of 8 in early 2009.

“A spike in mortgage interest rates along with the paralysis in Washington that led to the government shutdown and uncertainty regarding the nation’s debt limit have caused builders and consumers to take pause,” said National Association of Home Builders chief economist David Crowe.

but hopefully, the negative impact of the shutdown will be temporary. Crowe said in the report that he expects optimism to rebound as the dust settles.

3. Government Spending

As noted before, Standard & Poor’s estimates that the shutdown cost about $24 billion dollars, and the firm reduced its fourth-quarter GDP growth forecast from 3 to 2.4 percent. These are costs associated directly with the shutdown itself, but there was also a cost to resolve the shutdown. Chief among them, as far as economic output is concerned, are spending cuts.

While it is absolutely true that the U.S. should get its fiscal house in order and continue to reduce its enormous deficit, reducing government spending reduces economic activity. This is the cost of budget cuts, which the nation is already familiar with, thanks to sequestration.

In order to pass the stopgap measures that reopened the government and suspended the debt limit, Democrats conceded to Republican spending levels on many fronts. This is expected to add to the fiscal headwinds that have been blowing for the past few years — and that the U.S. Federal Reserve has liked to highlight in its economic outlook reports. Government spending was a negative contributor to GDP growth in the third quarter, and appears as if it will also negatively contribute in the fourth quarter.

4. Borrowing Costs

A huge part of the fiscal showdown in Washington was over America’s debt. At $16.7 trillion and counting, America’s total debt burden has become an enormous concern, and although the deficit is declining, many Americans do not believe it is falling fast enough.

In August, the federal government continued to spend more money than it made — but fortunately, the rate of growth of the government’s deficit has slowed. The Treasury reported total receipts of $185 billion for August and total outlays of $333 billion, yielding a deficit of $148 billion.

Total government receipts this fiscal year to date are $2.47 billion, about 13 percent higher than the same period in 2012. Total outlays this fiscal year to date are $3.23 billion, about 3.6 percent lower than the same period in 2012. The cumulative deficit of $755 billion is about 30 percent lower than it was this time last year.

In a bit of irony, the shutdown actually significantly increased the cost of servicing short-term U.S. debt for the duration of the impasse.

U.S. Short Term

Don’t Miss: Can the New York Giants Dodge Another Disaster?