America Braces for Economic Hit From Shutdown

Friday, 08 Apr 2011 02:22 PM

By David A. Patten

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As the standoff between Congressional Democrats, President Barack Obama, and Speaker of the House John Boehner continues, denizens of both Wall Street and Main Street fear a fragile economic recovery, already rattled by spiraling gas prices, could suffer serious damage.

A shutdown could have serious consequences for millions of Americans, especially if the impasse continues for weeks to come.

Stocks edged lower Friday as the prospect of a shutdown, which most on Wall Street considered unlikely a week ago, appeared to grow more realistic by the hour.

By any measure, the impact of a shutdown would be far-reaching.

Perhaps hardest hit sector: The already troubled housing market, which would suffer yet another blow. The Federal Housing Administration, which now accounts for three times the mortgages that it underwrote when the last government shutdown occurred in 1995, would no longer provide guarantees on mortgage loans.

The concerns over the FHA loans were reflected in downward declines for major bank stocks on Friday. JPMorgan Chase announced it plans to stop making FHA loans during a shutdown.

“I think the economic damage from a government shutdown would mount very quickly,” Moody’s Analytics chief economist Mark Zandi warned. “And the longer it dragged on, the bigger the hit to business, consumer and investor confidence, the greater the odds of a renewed recession.“

Zandi has estimated the direct cost in lost revenue to federal workers and contractors would be about $6 billion per week. Goldman Sachs has projected an even greater drag on the economy -- $8 billion a week.

If a shutdown happens, the economic impact would largely depend on how long the stalemate continues, economists generally agree. One of their big worries: The shutdown would soften U.S. economic activity precisely as oil prices appear to have set off on a determined march toward $4 a gallon gasoline.

“Oil prices were making me nervous a month ago, but now oil has become a critical issue,” Harris Private Bank chief investment officer Jack Ablin told CNNMoney.

Other possible wide-ranging effects of a shutdown that economists warn could hurt the nation’s economy, and ultimately the job market:

• The data flow that investors use to make their buying decisions would greatly diminish. The units of the Labor and Commerce departments that issue major economic reports on unemployment, employee compensation, and inflation would postpone their reports. The longer the stalemate goes on, the more significant the dearth of information would become.

• The lack of economic data could even impact the Federal Reserve, which carefully studies fluctuations in commodity prices to determine whether to bump up interest rates. Key indicators scheduled for release next week include U.S. import prices, trade data, and weekly jobless claims.

• The April unemployment report is scheduled for a May 6 release. If an impasse drags on that could be delayed.

• Upstart companies that want to go public and float initial public stock offerings would have to wait. The Securities and Exchange Commission has announced that it will not process any new filings if a shutdown occurs.

• Some 800,000 federal employees would be furloughed nationwide. Unlike in previous government shutdowns, both Democrats and Republicans are warning that due to the nation’s dire economic circumstances in is unlikely furloughed workers would receive back pay.

• 92,000 of those furloughed employees would come from the Treasury Department. This would delay the processing of some tax returns. The Department has also warned its analyses of global economic trends and international banking would be discontinued. Hundreds of Wall Street number crunchers and analysts rely on this data.

• Businesses say a shutdown would only increase the uncertainty over the economic climate that, until recently at least, has made them very hesitant to increase their work force. The Washington, D.C.-based Business Roundtable released a statement warning a shutdown “would have negative and unforeseen consequences, including heightening uncertainty and disrupting basic business services to government agencies.”

• States already fighting a tide of red ink would face major cash crunches, even if federal funds only dried up temporarily.

Whether these issues could propel the U.S. economy into a double-dip recession would simply depend on the duration of the shutdown, economists say.

The other big issue is the need in the next month or two to raise the U.S. debt ceiling. If that provokes another shutdown, Chris Kruger, a policy analyst at MF Global told Thomson Reuters the effect could be disastrous. “A default shutdown… would result in panic in both the equities and bond markets,“ he said.

But CATO economist Chris Edwards tells Newsmax a greater danger to the economy would be to fail to rein in federal spending.

If the Republicans don’t stick together this year, and force action on these and further major spending cuts, then the US economy will be damaged as we hurtle toward a debt crisis in coming years.

© 2014 Newsmax. All rights reserved.

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