Government Shutdown Creates Greater Insecurity in a Weak Economy

Now that the U.S. federal government has been shut down, what does that mean for the economy? It depends on a lot, namely how long it lasts. But it is already rattling markets and is estimated to have negative economic impacts, according to news reports. Members of both political parties have stated that the shutdown is not good for the economy. The White House has stated that a one-week shutdown (which some experts view as likely) would cost the economy $10 billion.

This shutdown is broader than the ones in the fall/winter of 1995 and most of the other ones that occurred are “not really comparable to what's happening now,” according to former House and Senate budget committee staffer Stan Collender.

Here are a handful of news items on the market and estimated economic impacts since yesterday:

Markets Slide Worldwide Amid U.S. Budget Battle,” The New York Times

Investors are worried that even a temporary government shutdown could endanger an already weak economic recovery.

Stock markets fell worldwide on Monday as political disagreements in Washington made a shutdown on Monday night increasingly likely.

The Standard & Poor’s 500-stock index closed down about 0.6 percent at 1,681.55. The Dow Jones Industrial Average closed down 0.84 percent at 15,129.67, and the Nasdaq composite index closed down 0.27 percent at 3,771.48. Leading indexes ended down 2.1 percent in Japan, 0.8 percent in Germany and 1.2 percent in Italy.

While many economists have said that the direct blow to the economy would be relatively modest if a shutdown lasted only a few days — as past shutdowns have — the political battles could hurt confidence.

“The hit to consumer and business confidence from such an outcome could be substantial, increasing the shutdown’s effects,” Gennadiy Goldberg, a United States strategist at TD Securities, wrote to clients on Monday.

Any reduction in spending would be problematic because economic growth has already been more sluggish than most policy makers want. The Federal Reserve determined recently that the economy was too weak to withstand even a small reduction in the central bank’s stimulus efforts.

On Wall Street, the fears about a government shutdown were overshadowing a few recent indicators that the economy may have been strengthening.

Washington's Budget Standoff Poses Threat to Recovery,” The Wall Street Journal

A survey by the Business Roundtable “found that half of top executives said the budget fights were crimping their hiring plans.  ‘We want leaders to lead and compromises to be found, because not doing that would have a serious impact on the economic growth of this country,’ the group’s chairman, Boeing Co. CEO Jim McNerney, said earlier this month.”

Washington area could lose $200 million a day if shutdown occurs, economist says,” The Washington Post

The Washington region, home to the largest concentration of federal workers and contractors in the nation, could lose an estimated $200 million a day and could see more than 700,000 jobs take a financial hit if the federal government shuts down Monday night, according to a local economist’s projections.

And that’s not counting the blow to tourism, one of the region’s economic mainstays, if the Smithsonian museums, the National Zoo, Civil War battlefields and other federally funded attractions are shuttered, said Stephen Fuller, director of George Mason University’s Center for Regional Analysis.

Fuller, who made his calculations over the weekend thinking that a shutdown would be inevitable, projected that 60 percent of the area’s 377,000 federal workers would be deemed “nonessential” and would stay home.

Likewise, he projected that the shutdown would affect about 20 percent of the government’s contractors, who receive about $75 billion a year from the federal government. And each person furloughed means less money spent at local businesses or vendors, he said.

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