Stalled pallets of goods idling at ports. Reduced foot traffic at sandwich shops in downtown Washington. Canceled vacations to the Capitol and to destinations abroad. Slashed corporate earnings forecasts. Higher interest payments on short-term debt.
Even as the shutdown of the U.S. government and the threat of a default appear to be coming to an end, the cost of Congress’ gridlock has already run well into the billions, economists estimate. And the total will continue to grow after the shutdown ends and uncertainty persists about whether lawmakers might reach another deadlock next year.
A complete accounting might take months to put together once the government reopens and the Treasury returns to adding to the country’s debt. But economists said that the standoff would take a bite out of fourth-quarter growth, with knock-on effects for employment, business earnings and borrowing costs. Those effects would be global.
“We saw huge effects during the summer of 2011, with consumer confidence hitting a 31-year low in August and third-quarter GDP growing just 1.4 percent,” said Beth Ann Bovino, the chief U.S. economist at Standard & Poor’s. “Given that this round of debt ceiling negotiations” is coming during a shutdown, she said, “the impact on the economy could be even more severe.”
Economists were quick to point out that the shutdown and near-breach of the debt ceiling would be unlikely to derail the recovery. In the weeks after the government reopened, there might be a “snap back” as employees spent their paychecks for the days they were on furlough and the government rushed to process backlogged orders. Still, many businesses might not recover all of the money they would have made had the government operated normally, said Shai Akabas of the Bipartisan Policy Center, a Washington-based research group.
The two-week shutdown has trimmed about 0.3 percentage points from fourth-quarter growth, the forecasting firm Macroeconomic Advisers, based in St. Louis, has estimated. Standard & Poor’s, the New York ratings agency, estimates that the shutdown will cut about 0.3 percent off inflation-adjusted GDP for each week the shutdown drags on. Most analysts are predicting that growth will remain subpar, probably running at an annual pace of around 2 percent.
The shutdown has already led to the biggest plunge in consumer confidence since the collapse of Lehman Brothers in 2008. And it has had ripple effects on many industries that rely on the federal government in one way or another. Import inspections, export financing and oil and gas permitting have come to a halt, in some cases.
Residential real estate, which has been one of the brightest points of the recovery, appears to be taking a hit. An index of sentiment among home builders fell in October from a month earlier, according to data out Wednesday from the National Association of Home Builders. The drop was greater than analysts expected. One cause for the decline is that the approval process for government-backed mortgages has slowed with the shutdown.
Although companies have generally reported healthy earnings for the third quarter, an unusual number have been warning that the fourth quarter is not going to look as good, in part because of the political turmoil. Of the 105 companies in the Standard & Poor’s 500-stock index that have reported earnings so far, 68 have provided negative guidance, according to S&P Capital IQ.
The impasse on the debt ceiling already has raised the United States’ short-term borrowing costs, with investors demanding triple the interest payments they demanded just a few weeks ago, in some cases. Concerns about the United States as a borrower might have a much longer and deeper effect than the shutdown, analysts think.
“Even with a deal to avoid a default, the damage has been done by the fact that we have had a debate questioning whether the U.S. will pay back its debt,” Laurence D. Fink, the chief executive of the money manager BlackRock, said Wednesday.
That means higher borrowing costs in the United States and elsewhere. The World Bank has estimated that a similar standoff in 2011 raised borrowing costs in poor countries by about 0.75 percentage point, and that those costs remained elevated for months.
“The reputational damage is done,” said Markus Schomer, chief economist at PineBridge Investments in New York. “Regardless of whether we get a deal, there will be efforts to diversify away from the United States in terms of assets.”