Government Shutdown & Possible Economic Impact

NEW YORK (CNNMoney) — A government shutdown could cost the still struggling U.S. economy roughly $1 billion a week in lost pay by furloughed federal workers. And that’s only the tip of the iceberg of the economic impact.

First, there are the estimated 800,000 federal employees who will be off the job. It’s roughly the same number of workers employed in all the auto assembly lines and auto parts factories across the country.

But economists say the impact will come not just from those lost wages, but also from businesses cutting back or halting their operations.

Then, there’s the impact from increased business uncertainty that trims investments and disrupts financial markets. Finally there is likely to be a pullback in spending by all the affected employees.

The total economic impact is likely to be at least 10 times greater than the simple calculation of lost wages of federal workers said Brian Kessler, economist with Moody’s Analytics. His firm estimates that a three to four-week shutdown will cost the economy about $55 billion.

“If it’s a relatively short shutdown, it’s a minor headache,” he said. “But if it lasts several weeks, the people affected start to act like they’re unemployed. They delay larger purchases. That’s why you start to see a significantly greater effect the longer it goes .”

Many federal contractors will also have to cut back on staffing if they can’t provide their normal goods or services to the government. There’s also a large variety of businesses that depend on the government to conduct their normal operations — tourism businesses that depend on national parks staying open, for example.

“The private sector impacts are quite large,” Kessler said.

There’s also a variety of impacts of a government shutdown that aren’t as obvious.

The Federal Housing Administration, which last year backed 45% of loans used to buy homes, said Monday it won’t be able to underwrite and approve new loans if there’s a shutdown. The housing recovery has been a bright spot in the economy this year, but home purchases could take a hit if FHA loans applications are not be processed. A shutdown also will hurt small business growth and investment as the Small Business Administration also won’t be able to process loan applications. Tourism and even air travel could be affected since the state department won’t be able to issue visas to allow many foreign travelers to come here.

But the real worry for economists is not what happens from a government shutdown. The real worry is if that legislative battle prevents the debt ceiling from being raised before Treasury runs out of cash to pay the nation’s bills.

“A protracted shutdown would cause larger, escalating disruptions, including induced declines in private production and rising risk premiums in financial markets,” said a note from Macroeconomic Advisors. “However, we see the possibility of hitting the debt ceiling later this fall as a far larger threat to the economic outlook.”

Mark Zandi, chief economist for Moody’s Analytics, testified before Congress last week that while a shutdown would slow economic growth, breaching the debt ceiling would force far deeper spending cuts that would quickly plunge the U.S. economy back into recession.

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