Government shutdown unlikely to damage economy, but debt limit could be catastrophe

The U.S. is the only big country with a debt ceiling. The Post's Karen Tumulty explains why. (The Washington Post)
October 7, 2013

The economic damage from the government shutdown will probably be muted as thousands of Defense Department employees returned to their jobs Monday and lawmakers worked on a deal to provide back pay to furloughed civil servants.

Economists warned that some effects will linger, with consumers feeling spooked and pockets of the economy afflicted by closed national parks or a slowdown in government-related business.

But the collective impact of a scaled-back shutdown is expected to be small, and many economists have already shifted to sounding the alarm over a significantly scarier scenario: the likelihood that a paralyzed Congress will allow the nation to default on its debts.

The government could run out of money to pay its bills as soon as the middle of this month if Congress fails to raise the borrowing limit. That would undermine global confidence in the United States as the world’s financial safe haven and could permanently increase the nation’s borrowing costs.

“This becomes a bigger problem than the one we had this time last week, when it was just the shutdown,” said Stephen Fuller, director of George Mason University’s Center for Regional Analysis.

Wonkblog’s Daily Default Dashboard: Is it time to panic yet?

Fuller had estimated that the Washington region would lose more than $200 million a day during the shutdown, largely in lost income for federal workers. But over the weekend, the House passed a bill that would pay employees for their time at home. The Senate is planning to move forward on the measure this week. Fuller said the bill would turn the furloughs into paid vacations, diminishing the economic impact of the shutdown.

Meanwhile, the Pentagon called back almost all of its employees, saying they provided direct support for the active-duty military. That helped defuse a potential cascade of furloughs in the Washington region’s $70 billion government contracting industry.

Bethesda-based Lockheed Martin had said Friday that it would furlough 3,000 of its roughly 120,000 employees but trimmed that figure to 2,400 on Monday, after the Pentagon’s announcement. The company said the majority of those employees — 2,100 working on civilian-agency programs and 300 on Pentagon programs — are based in the Washington area. They will be paid for vacation time during the furlough, and the company will advance up to 40 hours to workers who have not accrued enough time.

Hartford, Conn.-based United Technologies canceled its plans to furlough nearly 2,000 workers this week. McLean-based Science Applications International Corp. said it has sent hundreds of employees home but continues to provide them pay and benefits, while Falls Church-based General Dynamics said it has not furloughed any employees.

Other types of businesses that rely on federal workers, such as food trucks and restaurants, may not be able to recoup lost revenue. Tourism may also be hit as national museums and parks remain closed.

“This all comes down to a confidence issue,” said Lindsey Piegza, chief economist for Sterne Agee. “The consumer is just very, very sensitive to the shenanigans in Washington.”

A survey by Gallup showed that Americans’ confidence in the U.S. economy plunged as the government shutdown became reality and that it continued to slide through the end of last week. The Gallup index now stands at its lowest level since December 2011.

Investors are also getting worried. A poll by TD Ameritrade over the weekend found that nearly three-quarters of investors said they were beginning to lose confidence in the recovery. Though the bulk of them have not made changes to their portfolios, about 10 percent said they have moved some of their money into cash.

“It’s affecting their opinion about how the government’s running the economy,” said J.J. Kinahan, chief strategist at TD Ameritrade.

Doug Handler, chief U.S. economist at IHS Global Insight, estimated that the shutdown would shave about six-tenths of a percentage point from the nation’s gross domestic product during the fourth quarter. His calculations assumed federal workers would be paid eventually, but he said the benefit of an early return by Pentagon employees was almost too small to measure.

Not raising the nation’s debt ceiling, however, could be catastrophic. A recent report by Goldman Sachs projected that halting Treasury payments would slash the growth of gross domestic product by 4.2 percentage points over a year. Although economists think the likelihood of default remains small, even flirting with not raising the debt limit could roil world markets.

“There’s a modest amount of uncertainty and inconvenience associated with the shutdown,” Handler said. “But that will get magnified once the debt-ceiling debates get very intense.”

Some firms have gone to great lengths to soften the blows from Washington. At Falls Church-based technology contractor IntelliDyne, just over a dozen of the company’s nearly 300 employees have been furloughed. Company executives, concerned about how they would pay the workers, pooled their own vacation time to create a bank of hours the furloughed can draw from.

“I have a bunch of vacation saved up that I know I’m not going to take,” said Tony Crescenzo, IntelliDyne’s chief executive. He kept about four days for himself for Thanksgiving and Christmas.

After collecting about 500 hours from executives, they allowed employees to donate. The bank is up to more than 1,000 hours, which will ensure the furloughed workers can still be paid for weeks, Crescenzo said.

“It’s unfortunate that private companies can find a way to do this kind of thing and Congress can’t do it,” Crescenzo said.

Ylan Q. Mui is a financial reporter at The Washington Post covering the Federal Reserve and the economy.
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