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With recovery fragile, shutdown will hit United States economy

Wednesday, 02 October, 2013, 12:00am
News›World
UNITED STATES
McClatchy-Tribune in Washington

The last time the federal US government shut down, for three weeks in the winter of 1995-96, the American economy felt a jolt but recovered quickly.

Things don't look anywhere near as promising this time around.

The nation is currently more than four years into an economic expansion with some momentum behind it. That also was the case in 1995. But this time, things are a lot more fragile.

Americans continue to suffer from a relatively high unemployment rate of 7.3 per cent, which is about 2 percentage points higher than in December 1995. Back then, job growth was stronger, the economy was starting to benefit from the technology boom and baby boomers were entering their prime earning years, not preparing for retirement.

The recovery from the recession has been sluggish and repeatedly held back by political budget battles, but many had been hoping the economy would pick up steam heading into next year.

The housing and stock markets have been growing, and consumers have cut debt and are feeling more confident.

Estimates of economic effect vary.

However, most analysts predict that a two-week partial government shutdown would shave 0.3 to 0.4 percentage points from economic growth in the fourth quarter. Much of this would be due to lost pay for hundreds of thousands of laid-off federal workers.

Although not devastating, that's not a small amount either, especially for an economy that has been growing this year at an anaemic annual rate of less than 2 per cent.

Massachusetts-based IHS estimates that its forecast for 2.2 per cent annualised growth in the fourth quarter will be reduced by 0.2 percentage points in the event of a shorter, one-week shutdown. A 21-day closing like the one in 1995-96 could cut growth by 0.9 to 1.4 percentage points, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

The shutdown would also cost the US at least US$300 million a day in lost economic output at the start, according to IHS.

It's unclear whether federal workers considered to be in non-essential jobs and facing lay-offs would be able to recoup their pay, as they did in 1996. The current political environment suggests this would be hotly contested.

If a shutdown were to last more than a short period, Ebony Brown figures she would have to look for another job. Brown works in the cafeteria at the National Museum of Natural History in Washington.

"You've got to pay bills," she said on Monday.

Additional reporting by Bloomberg

More on this: 
US government shutdown greeted with disbelief around the world [1]
Obama blames shutdown on Republican 'ideological crusade' [2]

Source URL (retrieved on Oct 3rd 2013, 3:04pm): http://www.scmp.com/news/world/article/1322427/recovery-fragile-shutdown-will-hit-united-states-economy

Links:
[1] http://www.scmp.com/news/world/article/1322428/us-government-shutdown-greeted-disbelief-around-world
[2] http://www.scmp.com/news/world/article/1322473/obama-blames-shutdown-republican-ideological-crusade