NEWS

4 ways the U.S. shutdown cost the economy

10/17/2013 01:08 EDT | Updated 01/23/2014 06:58 EST
U.S. federal government workers are back on the job today, after Congress approved a deal late Wednesday to avert a default hours before the government reached its $16.7-trillion US debt limit.

President Barack Obama acknowledged Thursday morning the damage to the U.S. economy caused by the 16-day stalemate.

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"There are no winners here," he said. "These last two weeks have inflicted completely unnecessary damage on our economy."

The deal struck by Congress sets a new date – Jan. 16 – for the Republicans and Democrats to work out their differences over the U.S. budget, and permits the Treasury to borrow normally through Feb. 7 or perhaps a month longer.

But that new deadline augers an ongoing period of wrangling and uncertainty that could play havoc with markets. 

In the meantime, here’s a look at how the shutdown hurt the U.S. economy.

Economic growth drags down

Import inspections, export financing and applications to issue oil and gas permits have all been on hiatus. There were delays in delivery of government contracts, with $217 million per day in lost federal and contractor wages in the Washington, D.C., area alone. Small business loans and services were suspended as were safety inspections on consumer products, including food and autos.

Forecasting firm Macroeconomic Advisers, based in St. Louis, estimated the shutdown reduced fourth-quarter economic growth by about 0.3 percentage point, or about $12 billion. It also estimates job creation has been held back, by about 900,000 U.S. jobs.

Joel Prakken, co-founder of Macroeconomic Advisers, says this pattern of brinksmanship and short-term policy patches in Washington is damaging.

"Buying a house, buying a car, building a new plant that you'll be operating for years if not decades — all of those kinds of decisions seem riskier in the face of this sort of uncertainty," he says. "And the natural inclination is for households to delay those kinds of expenditures and for businesses to delay those kinds of investments."

Standard & Poor’s estimated an even larger impact, about 0.6 per cent off gross domestic product in the fourth quarter, keeping annual U.S. growth to below two per cent. S&P estimates the pain at about $24 billion US.

More significantly, the private sector is well aware of that Jan. 15 deadline, and the threat of more uncertainty over the U.S. budget is likely to dampen the outlook for businesses just as they put in place their plans for 2014.

U.S. bonds take a hit

Investors have been avoiding U.S. bonds maturing Nov. 1 and the yields on U.S. Treasury bills have risen, meaning the U.S. will end up paying more to borrow. Some investment firms, including market money mutual fund giant Fidelity, acknowledged they had dumped U.S. bonds. China, which holds $1.3 trillion in U.S. Treasury Bills, was among the bond holders that were very critical of the shutdown, because of the potential to export U.S. political uncertainty to the rest of the world. In this climate, investors are on the hunt for good-quality bonds from outside the U.S.

The threat of the Fed reducing its buyback of U.S. bonds is responsible for some of the rise in yields, but that tapering may be delayed by the shutdown, as the economy will remain fragile.

Down the road, the U.S. debt rating may be at risk. On Tuesday, Fitch credit rating service announced that it put the U.S. on credit rating, currently at AAA, on a watch negative because of government failure to raise the debt ceiling in a “timely” manner.

U.S. travel affected

The U.S. Travel Association estimates the U.S. lost $152 million per day in travel spending.

Part of that was the loss of National Parks and historic sites, everything from Acadia, to Yellowstone to Fort Sumter. The National Park Service estimate the shutdown cost $76 million a day. The Statue of Liberty had to reopen with retired workers.

Add to that the impact of people who delayed travel plans because they would not get documents in time and the visas that were not issued to enter the U.S. Fortunately for Canada, borders were not closed and border services continued to operate.

U.S. consumer confidence drops

Federal government workers spent two weeks without pay, so they have held back on spending. They’ll get back-pay, Obama said, but contractors are not likely to be reimbursed.

But the real casualty is consumer confidence, which has been hurt by the Washington impasse just ahead of the important holiday spending season. American voters know their government is not finished wrangling and an October survey showed consumer confidence at a nine-month low.

Part of the impact of this loss of confidence was seen in the housing market, which had been showing signs of recovery. An index of sentiment among homebuilders fell in October from a month earlier, according to data released on Wednesday from the National Association of Home Builders. That decline was caused in part by the shutdown of approvals for government-backed mortgages.

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