Burning money © Lumina Imaging, Digital Vision, Getty Images

Washington's budget standoff is spooking businesses and consumers, threatening the recovery even if lawmakers avoid a government shutdown or a potentially catastrophic default on the nation's debt.

The fights have pushed up measures of uncertainty and knocked down gauges of confidence. One barometer of risk tied to U.S. government debt has surged. Despite few signs of distress in the stock market, economists warn that months of rolling brinkmanship will cloud the outlook even without a government default.

"American businesses have this mentality where no one wants to make a decision because you have no idea what's lurking around the corner," said Jeremy Flack, president of Flack Steel, a Cleveland steel distributor. "Government needs to make us feel more solid about the state of affairs, and they're doing the exact opposite."

The congressional deadlock comes as the economy tries to gain traction more than four years after the recession ended. Consumers are slowly improving household finances. Businesses are boosting hiring at a modest pace. The housing market is regaining lost ground, and while the Dow Jones Industrial Average ($INDU) and S&P 500 ($INX) each fell more than 1% last week, the indexes aren't far off their record highs. Most investors say they are more concerned with near-term decisions about the Federal Reserve's bond-buying program than about news from Capitol Hill.

But confidence among U.S. consumers fell to a five-month low this month, according to a gauge by the University of Michigan released Friday. Business confidence has dipped as well. A survey by the Business Roundtable, a trade group for big-company CEOs, found half of top executives said the budget fights were crimping their hiring plans.

"We want leaders to lead and compromises to be found, because not doing that would have a serious impact on the economic growth of this country," the group's chairman, Boeing Co. CEO Jim McNerney, said earlier this month.

On Friday, 236 business organizations -- including the Business Roundtable and U.S. Chamber of Commerce -- wrote to lawmakers urging them to keep the government open, raise the federal borrowing limit and pivot their attention to longer-run budget concerns such as entitlement spending.

Fiscal warfare can harm the economy directly and indirectly. Cutting government services -- either temporarily in a shutdown, or permanently through spending reductions -- can disrupt a broad range of commerce and hit American workers and businesses tied to the public sector. Indirectly, the annoyance from disruptions alongside the threat of damage to markets and the economy can dent confidence and weigh on corporate planning.

"It's an anxious time," said Christopher Romani, who founded Integrity Management Consulting, with his wife, Mary Beth Romani, in 2006. "Not as much effective business is getting done because people are legitimately distracted by what might happen." The McLean, Va., firm, which has about 100 employees, has projects with agencies throughout the federal government.

Romani, who is making contingency plans for a shutdown, said the anxiety within his company —and among its government clients —is whittling productivity. "We're looking at this a week at a time," he said.

Even a short government shutdown would harm the economy. Economists at Morgan Stanley estimate that every week of a shutdown would shave 0.15 percentage point from the quarterly pace of gross domestic product. (GDP grew at an annualized 2.5% pace in the second quarter, according to the latest government estimate.) That doesn't account for indirect damage to markets or confidence.

The stock market's relative calm in recent weeks may be masking potential damage ahead. Investors, who tend to focus on shorter-term concerns, often don't react until the last minute. That happened two years ago, when lawmakers went down to the wire on pacts in the spring and summer of 2011 to avoid a government shutdown and a debt default. Another accord, crafted in the closing hours of 2012, averted the budget cuts and tax changes known as the fiscal cliff.

More from The Wall Street Journal

Breaching the nation's borrowing limit and defaulting on debt would be unprecedented and pose the graver economic risk, as it could drive up U.S. borrowing costs and tarnish the nation's credit rating in the long run. The fight alone could roil financial markets as it did starting in late July 2011, when a standoff triggered Standard & Poor's to downgrade the nation's triple-A credit rating, contributing to a 16% decline in the Dow Jones Industrial Average in the months that followed.

Most observers think a default this time is likely to be averted, as it was two years ago, by an 11th-hour deal. Still, Flack Steel's business took a hit from all three crises in 2011 and 2012. "You can watch our earnings evaporate three months after each event," Flack said. "Our customers start pulling back their business" in the weeks around every fiscal deadline in Washington.

The steel industry already is suffering from high raw-material prices and a glut of steel on the world market, among other things. Some steel executives had been hoping the U.S. government would order up new steel-intensive infrastructure projects, something that seems increasingly unlikely. Sales to companies for highway construction and infrastructure projects have been "like a yo-yo," Flack said, with discord in Washington disrupting supply cycles and telescoping outlooks to a few months from a few years. Customers that once took the long view "have become very shortsighted" and reluctant to commit capital, he said.

After the fiscal-cliff standoff, business spending as a share of the economy fell 4.6% in the first quarter of 2013 from the previous quarter.

Similar caution is evident nationwide today. A Moody's Analytics gauge of uncertainty over government policy is on the rise, similar to surges during previous budget battles. The measure is based on credit-default swaps on U.S. Treasury debt, aspects of certain tax provisions and surveys of businesses about their regulatory concerns.

In August, one benchmark of economic confidence registered its first decline in six months. The Equipment Leasing and Finance Association's index of new business was down 11% from July —and 7% from August 2012.

The drop in the index, which measures leasing and financing activity for commercial equipment used in technology, health care, energy and other sectors, is due to waning confidence, said Adam Warner, president of Key Equipment Finance, the Colorado-based arm of financial-services firm KeyCorp.

Instead of stepping up their leasing, businesses are postponing commitments. "They are thinking, ‘'Let's push this off and see what's going to happen. Is the economy going into a tailspin because of a possible government shutdown?'" Warner said.

Click here to become a fan of MSN Money on Facebook

Such retrenchment ripples through the broader economy and can be a bellwether for the labor market. "When a business is acquiring equipment, chances are you are going to be hiring someone to operate that equipment," Warner said. "When we see a fall in that activity, typically there is going to be less employment."

More from The Wall Street Journal