POLITICS: PennAve

Government shutdown may push economy into recession, the question is when

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Jobs,Labor,Finance and Banking,Goldman Sachs,Debt Ceiling,Entitlements,PennAve,Joseph Lawler,Economy,Budgets and Deficits,Food Stamps,Government Shutdown

Overshadowed by the looming threat of a U.S. government default, the ongoing government shutdown is stretching into a third week. The economic damage caused by the lapse in funding has so far been limited, but it will grow more severe if Congress doesn't approve funding for normal operations.

The only question is at what point exactly things will turn from bad to worse.

One possible outcome of the congressional negotiations over the debt ceiling is that the shutdown could continue even after the debt ceiling is raised or suspended.

That raises the prospect of the shutdown extending for weeks or even months. If that happens, American Action Forum President Douglas Holtz-Eakin, and economist, said, “no one really knows” what the consequences will be.

One clear impact of the shutdown so far is that some government workers aren’t getting paid. That lowers growth in an accounting sense: the government is spending less on salaries, which shows up directly in the calculation of gross domestic product. In practical terms, it also means a slowdown in commerce. When federal workers can’t pay for a babysitter or for contract work on their homes, said Chad Stone, the chief economist of the Center on Budget and Policy Priorities, that creates a “multiplier” effect of slowing consumer spending: that babysitter or contractor is also then left with less money to spend.

The economic impact of unpaid federal employees is relatively easy to quantify. “The effect is linear; a five-day shutdown would have five times the effect of a one-day shutdown,” an Oct. 2 Goldman Sachs research note on the shutdown concluded.

Separately, Deutsche Bank put a specific number on the hit to the economy: A 10 percent reduction in fourth-quarter gross domestic product for each week of the shutdown though that could double to a 20 percent reduction if the shutdown drags on for a third week. Crucially, that hit to GDP would be reversed in future quarters if federal workers received back pay, as is expected.

The larger question, however, is what — and when — the shutdown would begin to seriously hurt the private sector.

So far, there have been few signs that the shutdown is slowing commerce on a broad basis across the United States. But analysts aren’t sure when that will change, even if it is obvious that businesses cannot go without the missing government services forever.

“We don’t expect much impact from the government’s partial shutdown on the [private] sector unless it extends for months,” said Deutsche Bank economists, in as specific a projection as has been offered.

“There’s a whole series of dates” of mounting urgency, said Holtz-Eakin, but none that would mark a clear transition in the shutdown becoming a recessionary event rather than just an economic headwind.

One such date is Thursday, when federal courts have announced that they anticipate running out of funding (Thursday is also the day that the Treasury expects it will be left with only cash on hand and incoming taxes to pay the nation's bills).

Tuesday also is a key date. That's when Michigan Gov. Rick Snyder could begin the first of up to 20,000 furloughs of state employees, a dilemma all states could face as a prolonged shutdown begins to threaten social services like the administration of federal welfare and food stamp programs.

Tuesday is also the deadline for 12 million workers who filed for income tax extensions to submit their tax returns to the IRS. Any refunds due those taxpayers will have to wait until after the government reopens because federal furloughs have effectively shut down some agency operations.

Another significant problem, Holtz-Eakin said, will be approvals for imports and exports. With Christmas season approaching, choking up the supply of goods from abroad could be “a disguised version” of the 2002 West Coast dock worker strike that threatened that year’s winter economy. Bush broke the strike by invoking the Taft-Hartley Act.

Many more problems and regulatory failures are expected to crop up as the shutdown drags on. And while federal agencies prepared for this scenario and can weather a few weeks without additional funding, two weeks have already passed with no relief in sight, Stone said.

Nevertheless, the 1995-96 shutdowns totaled 26 days without seriously slowing growth.

But if the time comes when the shutdown does start to tip the U.S. toward recession, experts may not even see it coming. With the Bureau of Labor Statistics and the Bureau of Economic Analysis unable to publish economic reports during the shutdown, Stone said, “we won’t be able to know from the data.”

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