6 long-term effects of the government shutdown

The pain has just begun. We will still be feeling the consequences of the closure for weeks and months to come.

By The Week Oct 18, 2013 12:16PM

Image: Man holding empty wallet © CharlesSturge.com, Image Source, Getty ImagesBy Laura Colarusso, TheWeek.com

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 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.

More from TheWeek.com

Oct 18, 2013 1:11PM
The Republican need to figure out what their platform is going to be for the upcoming election. The tea party has hurt the republicans by alienating republican moderates and putting into power extremist like Ted Cruz and Alan West. These people do not represent the historical republican platform of states rights, fiscal responsibility (including paying our debts), and simplifying the tax code. Unless the republicans can find a new way to connect with the young, minorities, and women they will continue to lose the general election.
Oct 18, 2013 12:49PM

" . . . the same political theater may repeat itself in four months."


No one ever said it was Good Times for Most in a declining empire. There are better ways to manage the journey on down, but they all require an engaged electorate that can (and will) first agree on the reality. Hopefully, we will come up with some civil management that lands as softly as possible on a broad plateau of lowered expectations. Regrettably, we may well continue our descent toward civil war with a fascistic outcome financed by multinational corporate interests.


None of the outcomes is especially pretty. Then again, beauty is in the eye of the beholder.

Oct 18, 2013 1:18PM
All were either crap or going to happen anyway.
Oct 18, 2013 12:59PM
Thank you tea bags. Keep pretending that's what the people want. Number 7 on the list should be the war breaking out within Republican ranks. That's going to be around for a while.
Oct 18, 2013 1:39PM
The next time that the government shuts down and our government is asleep at the wheel, the southern states are going to secede again and be free of the parasite democrats.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.



Quotes delayed at least 15 min


There’s a problem getting this information right now. Please try again later.
There’s a problem getting this information right now. Please try again later.
Market index data delayed by 15 minutes

[BRIEFING.COM] The major averages ended the midweek session with slim gains after showing some intraday volatility in reaction to the release of the latest policy directive from the Federal Open Market Committee. The S&P 500 added 0.1%, while the relative strength among small caps sent the Russell 2000 higher by 0.3%.

Equities spent the first half of the session near their flat lines as participants stuck to the sidelines ahead of the FOMC statement, which conveyed no changes to the ... More


There’s a problem getting this information right now. Please try again later.