Prolonged government shutdown could take big bite out of U.S. growth

Reuters News
Posted: Oct 11, 2013 5:19 PM

WASHINGTON (Reuters) - U.S. economic growth could suffer a big hit in the fourth quarter if the partial shutdown of the U.S. government lasts more than a month, analysts are warning.

Economists estimate that the shutdown, which started on October 1, was chipping away roughly 0.1 percentage point each week from fourth-quarter gross domestic product.

"But if the shutdown lasts through the end of October, the economic damage would be significant, reducing real GDP as much as 1.5 percentage points in the fourth quarter," said Mark Zandi, chief economist at Moody's Analytics in West Chester, Pennsylvania.

"An interruption longer than one month would likely cause growth to stall in the quarter, and one longer than two months could precipitate another recession," he said.

Analysts said the impact on growth could be even worse if Congress failed to extend the government's borrowing authority past next Thursday's limit.

The shutdown was set to head into its third week as the White House and Republican leaders struggled on Friday to strike a deal on reopening the federal government and on a short-term increase in the country's borrowing limit.

Much of the hit to growth would come through reduced consumer spending as hundreds of thousands of furloughed workers postpone some purchases. Some government contractors and other non-federal workers have also lost their paychecks during the shutdown.

An early indication of the shutdown's impact on the economy came on Friday, with news that consumer sentiment hit a nine-month low in early October. Consumer sentiment is generally viewed as a key indicator of consumer spending.

Data on Thursday showed filings for unemployment benefits by non-federal workers helped lift jobless claims to a six-month high last week.

On Friday, some economists pared their fourth-quarter growth forecasts in light of the shutdown. Forecasting firm Macroeconomic Advisers cut its fourth-quarter GDP estimate by 0.2 percentage point to 1.9 percent. Citigroup trimmed its growth forecast by 0.3 of a percentage point to 2.4 percent.

"Although we would expect furloughs to continue shrinking in an extended shutdown, the longer the delay in authorizing spending, the greater the incidence of negative spillovers to private activity will be," said Robert DiClemente, Citigroup chief U.S. economist.

"The direct effects of lost hours in the government sector in the fourth quarter would be reversed when workers return in full force. But there may still be deadweight second-order drags and uncertain effects from less supportive financial conditions."

For now, others are keeping their estimates unchanged.

"We are holding our call of 2.5 percent fourth-quarter GDP growth for now, but are keeping the axe close at hand in case the deal-making founders in any way and or the government shutdown persists," said Douglas Porter, chief economist at BMO Capital Markets in Toronto.

"Growth should rebound to 3.0 percent in first quarter of 2014 as furloughed civic workers spend their delayed salaries. But this won't be the last time Washington bickers over extending the government's funding and borrowing authority," he said.

(Reporting By Lucia Mutikani; Editing by Peter Cooney)