Billions lost in US standoff as doubts ripple around world
Containers of goods idling at ports. Reduced sales at sandwich shops in downtown Washington. Cancelled vacations to the capital and to destinations abroad. Slashed corporate earnings forecasts. Higher interest payments on short-term debt.
Even with the shutdown of the US government and the threat of a default coming to an end, the cost of Congress' deadlock has run well into the billions, economists estimate. And the total will continue to grow even after the shutdown ends, partly because of uncertainty about whether lawmakers might reach another impasse early next year.
A complete accounting will take months once the government reopens and the US Treasury resumes adding to the country's debt. But economists said the intransigence of House Republicans would take a bite out of fourth-quarter growth, which will affect employment, business earnings and borrowing costs. The ripple from Washington will be felt around the globe.
The 16-day shutdown itself has led to the biggest plunge in US consumer confidence since the collapse of Lehman Brothers in 2008.
"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 per cent," said Beth Ann Bovino, the chief US economist at Standard & Poor's, referring to brinkmanship over the debt ceiling. "Given that this round of debt ceiling negotiations" took place during a shutdown, she said, "the impact on the economy could be even more severe".
Economists say the shutdown and near breach of the debt ceiling would be unlikely to derail the recovery. In the weeks after the government reopens, there should be a modest rebound as employees spend their pay cheques for the days they were on furlough and the government rushes 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 Centre, a research group based in Washington.
The shutdown has trimmed about 0.3 percentage points from fourth-quarter growth, or about $US12 billion ($12.6 million), the forecasting firm Macroeconomic Advisers recently estimated.
"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 US will pay back its debt," said Laurence Fink, chief executive of the money manager BlackRock.
Residential real estate, which has been one of the brightest points of the recovery, suffered. An index of sentiment among home builders fell in October from a month earlier. The decline was greater than analysts had expected. One cause for the decline is that the approval process for government-backed mortgages has slowed with the shutdown.
While this fiscal impasse may be ending, many on Wall Street fear Washington is not done.
"Then we can come back some time in December, January and February," said Brian Gardner of Keefe, Bruyette & Woods, a New York investment bank, "and do this all over again."
InvestSMART FORUM: Come and meet the team
We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.
Want access to our latest research and new buy ideas?
Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.Sign up for free