The partial US government shutdown has taken US$24 billion out of the economy and will cut growth in the fourth quarter significantly, ratings firm Standard & Poor’s (S&P) said on Wednesday.
Moreover, S&P warned of more possible damage if the political battle over the budget and debt ceiling resumes in January, further scaring consumers, especially government workers laid off without pay during the shutdown.
As the US Congress struck a deal on Wednesday to resolve the stalemate over a new budget and raising the debt ceiling, S&P said the impact of the two-week-old shutdown likely will take 0.6 percent off fourth-quarter growth.
S&P now expects the economy to grow at a tepid annual rate of roughly 2 percent this quarter. Last month, it had predicted a 3 percent growth rate.
“The US economy dodged a bullet today,’’ an IHS Global Insight economist, Paul Edelstein, said. “But the reprieve will be short. ... The stage is set for another showdown in January.”
IHS lowered its forecast for growth in the October to December quarter to a 1.6 percent annual rate from a 2.2 percent rate.
The fall in growth is mostly due to the furlough of hundreds of thousands of civil servants, as well as impacted government contractors, because the Congress could not agree a budget for the 2014 fiscal year that began on Oct. 1.
A report from the Federal Reserve on Wednesday offered fresh evidence of the economic impact of the shutdown and debt limit fight.
The Fed’s report on economic conditions in its 12 banking districts found that employers in several districts were reluctant to hire because of uncertainty surrounding budget policies and the new healthcare law.
Manufacturing growth slowed in the New York region this month, builders were less confident in the housing recovery and growth slowed in four Fed districts.
All the reports cited the federal shutdown and impasse over the debt limit as reasons for the declines.
BMO Capital Markets senior economist Jennifer Lee said that the Fed’s survey, known as the beige book, showed that there had been only limited damage to the economy at least through the first week of the shutdown.
“Hopefully... the damage and the hurt have been generally contained,” she said.
Yet S&P pointed out that the deal reached tentatively on Wednesday in Congress would only fund the government through Jan. 15, and raise the debt ceiling to Feb. 7.
That portends potentially a fresh political crisis over both, and could frighten consumers from spending during the first quarter as well.
“The short turnaround for politicians to negotiate some sort of lasting deal will likely weigh on consumer confidence, especially among government workers that were furloughed,” S&P said.
“If people are afraid that the government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their checkbooks. That points to another Humbug holiday season,” it added.
Some analysts think the Fed is now unlikely to slow its monthly bond purchases until well into next year. The Fed has been buying US$85 billion a month in Treasury and mortgage bonds to try to keep long-term interest rates low.
The full economic effect of the budget standoff could take a month or more to assess because the release of so much economic data has been delayed. And Drew Matus, an economist at UBS, says that much of the economic data will be distorted by the effect of the shutdown, making it harder to discern underlying trends.