The US economy and consumer confidence have taken significant hits from a two week federal government shutdown, economists say, and a major dent to already sluggish American growth is expected.
Even as stock markets rebounded with gusto Wednesday, analysts said there was clear evidence of damage, and warned that a revival of political battles in January could inflict more pain.
The credit rating agencies Moody’s and Standard & Poor’s estimated that the partial closure of the government from October 1 would slice 0.5-0.6 percentage points from annualized growth in the fourth quarter.
S&P said the shutdown took $24 billion from the economy, as hundreds of thousands of government workers stayed at home unsure of getting paid, government contracts were delayed and national parks that drive crucial tourist industries were closed.
Because of that, several economists cut their forecasts for fourth quarter growth to around 2 percent, barely enough to generate the jobs needed to pull down unemployment.
Many said they expected the Federal Reserve would see the need to keep its stimulus in place through the end of the year, if not longer, to mitigate the drag from the crisis.
“The bottom line is the government shutdown has hurt the US economy,” S&P said.
Jim O’Sullivan of High Frequency Economics, added: “Even without an extreme outcome being realized, some damage has been done.”
Democrats and Republicans in Congress were expected to pass legislation late Wednesday to end the impasse by funding the government for the first part of fiscal 2014, which began on October 1, and increasing the debt ceiling.
The eleventh hour deal soothed worries that the Treasury could be forced to default on payments, including the debt, in the coming days.
Furloughed government workers are expected back at work on Thursday, and will collect back pay for the time spent laid off.
The deal sparked a strong rally on Wall Street Wednesday, with gains of nearly 1.4 percent. The markets were helped by still-buoyant profits in corporate America, with the results from the first releases of the third-quarter reporting season beating forecasts on average.
That left the S&P 500 index less than 1 percent shy of its peak, struck in mid-September.
Even so, the shutdown exacerbated what already appeared to be a weak spot in the economy, with higher interest rates from the Fed’s expected tightening of its stimulus beginning to slow activity in sectors such as real estate.
The Fed saw vulnerability when in September it decided not to begin reducing its $85 billion a month in bond purchases, though it also cited the dangers of the looming shutdown and debt ceiling fight.
But just how the economy performed last month remains unclear, because publication of key government data, especially the job creation and unemployment report for September, were canceled.
The Fed’s Beige Book survey of regional economic activity, released Wednesday, showed slowing in some areas since the September 4 report.
In addition, it noted “an increase in uncertainty” due mainly to the shutdown and fears over the frozen debt ceiling.
Several confidence indicators from private sector analysts have also shown pessimism. The University of Michigan consumer sentiment gauge fell to a nine-month low last week.
Most analysts expect a rebound in consumer activity as the country heads into the Thanksgiving-Christmas holiday season.
But the details of the deal struck in Congress will continue to weigh over markets and the economy. The deal only budgets the government through January 15, and caps the debt again on February 7, opening the prospect for renewed brinksmanship over fiscal issues in Congress.
That could make consumers and businesses more cautious about investment, spending and hiring, holding back growth.
“Many problems remain unsolved,” said Mark Hopkins of Moody’s Analytics.
“The bill sets the stage for negotiations over long-term deficit reduction by December 13, but previous attempts to achieve such a grand bargain have failed.”
S&P said: “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.
“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.”-AFP