Congress on Wednesday night finally passed a bill to open the government and raise the debt ceiling – sending hundreds of thousands of furloughed government employees back to work and avoiding a potential default on the nation’s debt.
Despite the immediate relief to many, these ongoing Congressional fiscal fights have had real consequences for a U.S. economy that’s still trying to stay on its feet. But just how much?
A new report from Macroeconomic Advisers argues that the debt-ceiling fights, budget debates and spending cuts since 2011 have shed nearly three percent of GDP. According to the report, the partial government shutdown trimmed about 0.3 percentage points from 4th quarter GDP growth. More reports will most likely come out the next few weeks detailing the economic pain.
You probably heard personal stories of the unfortunate pain felt by the furloughed government workers eager to get to work again while the bills started to pile. Small business owners also voiced their struggles, knowing that customers without paychecks aren’t shopping or going out for dinner.
Political gridlock causes uncertainty for both consumers and businesses and can reduce their appetite for spending and investment. According to Gallup’s U.S. Economic Confidence Index, consumer sentiment fell 12 points for the week ending October 6. That represents the largest weekly drop since September 2008, when the index fell 15 points after the collapse of Lehman Brothers!
Suppose you own a boat and want to drive out on the lake one afternoon to catch a few bass. However, you hear there’s potential for severe thunderstorms in the area. Do you ignore the warnings and take your chances or wait to see if the storm misses you?
The smart decision would be to wait until you’re certain the storm won’t hit you. Waiting is exactly what consumers do when trying to decide whether to spend during times of uncertainty. This holding pattern is what slows economic growth.
Fortunately, I still believe there are enough positive signs in the economy to overcome this temporary setback. Auto sales are still strong, the jobs market is slowly-but-surely improving and despite rising rates, the housing recovery appears to still be on track.
The current budget deal passed last night means that federal agencies will be funded through Jan. 15. However, the possible threat of a shutdown exists once again unless lawmakers come to an agreement on adjusting the deep automatic cuts known as the sequester, and reconcile separate budgets passed earlier this year by the House and Senate. In addition, this latest deal suspends enforcement of the debt limit until Feb. 7, potentially setting up – yes, once again – another confrontation over the national debt limit.
Let’s hope Congress comes to a long-term budget agreement that would remove some of the constraints that have been holding the economy back.