Is the Government Shutdown Hurting U.S. Economic Confidence?

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The federal government began its first partial shutdown in 17 years Tuesday morning after Congress failed to overcome a partisan disagreement over a temporary spending bill that would have funded operations for the beginning of the new fiscal year.

When the U.S. government last shut down for a total of 26 days between November 1995 and January 1996, the closure cost the federal government $1.4 billion, an amount equivalent to more than $2 billion in 2013 dollars. It was the most protracted government closure and the most costly in history. But as massive as that number is, the consequences for which no dollar amount can be assigned were just as large: the intangible losses in worker morale and confidence in the federal government.

Rather than forcing the government to save money, a shutdown causes a backload of expenses and work, and revenue is lost.

According to Doug Holtz-Eakin, the former director of the Congressional Budget Office, a disruption of government operations similar in length to the one that occurred in 1995 and 1996 would have a fairly small economic impact. As he told CBS, “a short government shutdown is not a very important event; it’s a hiccup.” In his opinion, the bulk of the costs, like reimbursing the salaries of furloughed workers, are transitory, and they are paid back later. “That’s really what happens. There’s some distraction costs that never go away and they’re real,” he said.

But not all experts agree. More specifically, research firm IHS calculated that the partial shutdown will cost the United States at least $300 million per day in lost economic output at the beginning. That may be a small fraction of the United States’s $15.7 trillion economy, but the daily impact of the shutdown is expected to accelerate the longer it lasts because it depresses confidence and spending by businesses and consumers.

The United States economy could ill afford a lengthy shutdown. IHS forecast annualized growth of 2.2 percent for the fourth quarter, but a week-long closure would shave off 0.2 percent from gross domestic product growth, while a 21-day closure could cut growth by 0.9 percent, to 1.4 percent, according to Janney Montgomery Scott’s chief fixed-income strategist, Guy LeBas.

Not only will the federal government have to pay the cost for “stuff that is not getting done” during the shutdown, former Republican Rep. Tom Davis of Virginia said to CBS, but “the morale costs on this to federal workers and contractors is huge.” While in past shutdowns federal workers were paid retroactively, there is no guarantee that will be the case this time.

A longer government shutdown is also dangerous because of the proximity of the debate over the U.S. debt ceiling. According to the Department of the Treasury, that borrowing authority will run out on October 17. The possibility that the federal government could default on its debt may further exacerbate the stock market reaction to the shutdown, which so far been has fairly nonexistent — the S&P 500, Dow, and Nasdaq were all trading in the green on Tuesday afternoon. In fact, the S&P 500 closed up 0.80 percent at 1,695.00, the Dow closed up 0.41 percent at 15,191.70, and the Nasdaq closed up 1.23 percent at 3,817.98. Likely, markets moved higher because the stalemate was already priced into the equities.

The rising indexes is not entirely unexpected. Bank of America Merrill Lynch research has shown that the S&P 500 has gained an average of 0.1 percent during each of the last 11 government shutdowns and gained a further 2.8 percent in the following month. However, the possibility of default is a far more concerning situation for markets than the shutdown. Plus, “once you move financial markets you hit the whole economy,” Holtz-Eakin told CBS. “That’s a different set of issues, much bigger than the shutdown. But they’re close together in time this year, conflated together in minds.”

Still, while the prices for credit default swaps on Treasury bonds doubled in the past several weeks, they remain low, near 0.4 percent of the principal amount insured. In the market’s view, the idea that the Treasury would ever let outstanding securities go unpaid is unlikely.

Even before the shutdown began on Tuesday, Gallup’s U.S. Economic Confidence Index showed a significant drop. The measure, which is calculated based on a three-day rolling average of responses from around 1,500 adults across the country, produced a reading of -24 for the September 28 through September 30 period.

Comparatively, at the beginning of the month, a reading of -17 was recorded. After peaking in late May and early June at -3, the best weekly average since Gallup began tracking this metric daily was in January 2008. Americans’ confidence in the economy has generally declined. However, in the middle of September, the index recorded a slight uptick thanks to a rosier economic outlook, but the trend has turned negative as debates in Washington over the federal budget and the debt ceiling began to reach a stalemate.

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Source: Gallup

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