Government shutdown has not revived recession

Government shutdown has small impact on GDP growth

by Alice Kantor

As the government shutdown from Oct 1^st to Oct 17^th, federal funding stopped. This two-week drop in public funding had a negative impact on US economy.

Direct effects are caused by the fact that civil servants’ pay and funds for industries were suspended. Therefore, public funding is expected to dip by 6.6% between the third and fourth quarter of 2013.

This portion impacts the country’s added value, aka the GDP. Federal funding accounts for 4.5% of the GDP, according to Moody’s Analytics. Thus, the direct decrease in GDP growth is a 0.3 percentage point drop, as estimated by Macroeconomic Advisers.

It means that, if the growth rate of the fourth quarter (Oct-Nov-Dec 2013) is 2.5%, it actually would have been 2.8%, had the government not shutdown.

But the economy also indirectly suffered from the shutdown. Government workers (some 450 000 people), through the suspension of their pay, lost their purchasing power. The industries saw the government purchase of their goods delayed or cancelled. Consumption and investment were therefore altered.

An analysis of those indirect effects by the US Congressional Budget Office suggests that a drop of $1 of government spending leads to a total drop of $1.2 in the economy.

Taking under consideration both direct and indirect effects, the total drop in GDP growth is a 0.5 percentage point. This represents a loss of $20 billion.

Yet, $20 billion do not constitute an amount significant enough to revive the recession. In fact, the shutdown’s impact on the last quarter’s growth is relatively small, considering total government expenditures amount to $5,824 billion (the loss represents 0.34% of that total).

That is mostly due to the fact that payments often were delayed, but not cancelled, and they were delayed for a short period of time.

However, the last quarter did suffer from a significant shock: that induced by the debt ceiling debate. The possibility that the US government might go bust, if Congress failed to agree on a volume of debt, caused a great shock in consumer confidence.

Consumer confidence indicates the degree of optimism consumers feel about the state of the economy and about their personal financial situation. Therefore, it evaluates factors essential to long-term prosperity: consumption and long-term shifts in consumption.

But in October, the Bloomberg Consumer Comfort Index, a reliable indicator for consumer confidence, reached a 6-month low.

With confidence dropping, financial markets and banks grow more anxious, limiting access to credit.

Finally, the prospects of Congressional impotence have reduced the businessman’s willingness to invest and hire. Half the CEOs in the Business Roundtable’s Third-Quarter Outlook Survey said Washington’s battles have affected their hiring plans for the next six months.

The economic impact of the government shutdown is small and restricted to this last quarter. A bigger issue is the hit Congressional ailments have on long-term consumer and business confidence. With economic recovery at a precarious stage, one would argue that factional politics and regular impediment of public funding could permanently hamper our way out of recession.