The pain has just begun
Now that the first government shutdown in 17 years is over and we’ve avoided defaulting on the debt (at least for a little while), life in America is returning to normal. Federal employees are going back to work. Museums and parks across the country are reopening. The panda cam at the National Zoo is up and running again.
But that doesn’t mean we won’t be feeling the consequences of the shutdown and debt ceiling fiascoes (sic) in the weeks, or maybe even months, to come. Thanks to the political theater in Washington, the full faith and credit of the U.S. government has once again been called into question and an already shaky economic recovery has been handed a major setback. It’s going to take some time to dig out of this self-inflicted hole.
Let’s take a look at six lasting effects of the fiscal brinkmanship:
1. GDP growth will likely decline
We’ve all heard anecdotes about restaurants remaining empty and family vacations being canceled because of the shutdown, but shuttering the government has been a tremendous drag on economic growth. Economists at Moody’s Analytics estimate that the shutdown caused a drop of 0.5 percentage points in gross domestic product, while Standard & Poor’s believes it “shaved” at least 0.6 percentage points off GDP growth in the fourth quarter of this year.
That amounts to taking roughly $24 billion out of the economy. Slower growth will send a signal to companies that it’s not time to invest, which in turn could lead to fewer jobs being created. Fewer jobs mean a slowdown in spending, and the cycle continues.
2. The veteran disability claims backlog grew
Eric Shinseki, secretary of Veterans Affairs, testified before Congress on Oct. 9 that the budget impasse was hampering his agency’s ability to rectify a massive backlog in disability claims. Hundreds of thousands of veterans — many of whom have been in limbo for more than a year — have been waiting for their claims to be approved and to start receiving disability checks. The VA had been making some progress before the shutdown. Between March and September, claims processors decreased the backlog to 418,000, from 611,000.
But the shutdown forced the furlough of 7,800 employees within the Veterans Benefits Administration, and the backlog grew again. The VA is still tabulating the damage that was done, but some estimates indicate as many as 2,000 cases may be affected.
3. CDC lost ground tracking the flu
It’s flu season, which means that the Centers for Disease Control and Prevention would normally be at work tracking viruses. This year, however, researchers lost almost three critical weeks to study whether the current crop of flu viruses will respond to anti-viral medication and whether the flu vaccine will be effective.
“It’s going to take us some time to assess where we are so we can salvage what we can,” said CDC spokeswoman Barbara Reynolds. It’s not clear how long it will take to get the research back up to speed, since 85 percent of flu trackers were sent home during the shutdown. “We’re trying to figure out what the priorities are,” said Reynolds. “The sooner in the flu season that we do these things, the better.”
4. Consumer confidence has plummeted
The shutdown undermined confidence in the economy, which slid in October to its lowest level in nine months. According to Thomson Reuters and the University of Michigan, consumer confidence fell on their index to 75.2 in October, from 77.5 in September. Another gauge, the Bloomberg Consumer Confidence Index, dropped 22 points from September to October.
When people don’t feel good about the economy, they tend to spend less. A recent survey commissioned by Goldman Sachs found that a whopping 40 percent of Americans cut spending because of the shutdown. That’s a problem heading into the holiday season, which is when retailers bring in a healthy portion of their revenue. “The timing is terrible from that perspective because the retail sector has been having a rocky year,” said Joe Fuller, a senior lecturer at Harvard Business School. “People are anxious about what’s going on in Washington, and so they’re saying it’s a good time to be prudent and save money.”
5. Research was disrupted
There are scores of research projects funded by the federal government, most of which were put on hold during the shutdown. Clinical trials for cancer patients were delayed. Scientists are scrambling to save data sets that track constantly changing ecosystems. And the 16-day hiatus affected research of annual arctic sea ice, climate change, and planetary exploration, just to name a few.
Furthermore, the National Science Foundation will most likely have to delay reviewing and awarding grant proposals. “If people have funding, they can continue, yes,” Stephen Merrill, director of science, technology, and economic policy at the National Research Council, told The Washington Post. “But anybody caught between grants or dependent on a new grant, or even the extension of an existing grant, they’re all directly impacted.”
6. Interest rates may increase
There are several factors that explain why interest rates go up and down, but the latest round of debt ceiling negotiations have creditors a little jumpy. (JPMorgan Chase sold all of its short-term Treasury holdings last week.) Rating agencies in the U.S. and abroad have signaled they aren’t pleased with members of Congress openly advocating for default.
Before a compromise was reached, Fitch Ratings put the U.S. on notice that its credit rating may be downgraded. “That immediately ripples through to pricing,” said Fuller, noting that lenders will want to adjust their interest rates to cover the additional risk. “When anybody who owes somebody money makes a credible threat that they are not going to pay, a prudent lender says that borrower is riskier than I thought.”
Even though Washington finally agreed to raise the borrowing authority until Feb. 7, Dagong, one of China’s four biggest credit rating agencies, dropped the U.S.’s rating from A to A- because the same political theater may repeat itself in four months.
- Goldman’s Jan Hatzius: shutdown could cut GDP growth to 2% (blogs.marketwatch.com)
- Budget fight damaged US economy (rinf.com)
- S&P: The Shutdown Took $24 Billion Out Of The US Economy (businessinsider.com)
- Number of the Week: Economic Impact of Shutdown Was Likely Small (blogs.wsj.com)
- The Government Shutdown Is (Almost) Over, but the Damage to Science Will Last (scientificamerican.com)