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Government shutdown: How much will it harm the economy? (+video)

A government shutdown won't have much of an economic impact if it lasts just a few days, but a prolonged shutdown could become a drag on overall consumer and business confidence. 

Government shutdown impact on US economy
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The US government shutdown that began Tuesday is a nuisance to many Americans and a hardship for legions of federal employees, but its impact on the economy is expected to be only modest – at least at first.

That’s the widely held view of forecasters. Economic damage could rise, however, if this partial halt of federal activity starts running longer than a week or two.

“Most of the federal government will keep running in the event of a shutdown, but a significant number of federal employees will be furloughed without pay, perhaps as many as one million,” write economists Ethan Harris and Michael Hanson of Bank of America Merrill Lynch. “The impact on … GDP growth should rise with the length of the shutdown.”

In their estimate, the first couple of days of shutdown has little discernible impact on gross domestic product (GDP) for the fourth quarter. But a two-week shutdown could lop half a percentage point off the annualized pace of economic growth for the quarter.

For reference, economists in a recent survey predict that GDP will grow at a 2.6 percent rate in the fourth quarter.

If the shutdown goes on for a full month, the Merrill Lynch economists see a harsher toll, crimping that growth rate by 2 full percentage points.

Many economists are more optimistic. The investment firm Morgan Stanley pegs the likely drag on growth at 0.15 percentage points for each week of a shutdown.

“For every day of shutdown, federal compensation … is reduced by $400 million,” said economist Alec Phillips of Goldman Sachs, in an analysis Wednesday. “The effect is linear; a five-day shutdown would have five times the effect of a one-day shutdown.”


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