Wednesday, October 2, 2013

Shutdown: "Economists React"

From Real Time Economics:
A brief government shutdown is expected to have only a modest direct impact on the U.S. economy. The furloughs are likely to knock 0.1 to 0.2 percentage point off the annualized rate of fourth-quarter economic growth for each week that it lasts. (That excludes any hit to the private sector and overall confidence.)
But the larger threat is the looming debt-ceiling deadline, which the Treasury Department has set as Oct. 17. Without action by lawmakers, the Congressional Budget Office says the government might not be able to pay all of its bills by the end of the month. Economists and analysts weigh in:

Inside the beltway this may look like a “zero-sum game” where one party’s win is the other party’s loss. However, outside the beltway, we believe this is very much a negative-sum game: the odds of a major shock to the economy and a full-blown correction to the stock market have risen. Ironically, we think this also puts upside risk to the budget deficit – due to shutdown costs and reduced revenues – and it does not slow implementation of the Affordable Care Act . –Ethan Harris, Bank of America Merrill Lynch

Overall, we believe the market is too complacent about the risks of a technical default. … The signs of more trouble ahead are everywhere. The GOP caucuses in the House and Senate are in complete disarray; no one is negotiating; Democrats are leaking private email exchanges between top staffers in Boehner’s and Reid’s offices, making any future negotiation even more difficult; and President Obama and top administration officials are keeping their distance. It is still not the base case, but the conditions are ripe for a debt ceiling debacle. –Andy Laperriere and Roberto Perli, Cornerstone Macro LP
 
Although the shutdown has generated urgent headlines, the economic impact may not be as dire as some predict, as long as it is not a protracted stalemate. Spending should be restored retroactively, and the markets are likely to be sanguine as they have priced in, and almost expect, congressional dysfunction around these matters. The shutdown may create volatility, but should not change market direction. –Tim Hopper, TIAA-CREF
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