Government shutdown obscures economic picture

(MoneyWatch) Last month's U.S. government shutdown is making it difficult to get a handle on the state of the economy.

Payroll numbers due out on Friday are expected to be ugly, but experts say that is largely because government labor data are skewed by the 450,000 federal workers who were furloughed during the 16-day closure. The U.S. Labor Department will count those employees, who returned to work last month, as unemployed for October.

That could send the official jobless rate up from the current level of 7.2 percent to around 7.5 percent, according to forecasters. The shutdown will also make job growth last month look much worse than it really is. 

"It's pretty clear there's going to be some major distortions because of the shutdown," said Jim O'Sullivan, chief U.S. economist for High Frequency Economics, who expects monthly payroll growth of only 85,000 for October. That would represent a steep drop from the previous month, when the economy added 148,000 jobs. Through September, employers have added about 185,000 jobs per month this year.

"There's a real case for dismissing that report, which will look pretty weak," O'Sullivan said, adding that job-creation is likely to bounce back in November after the effects of the government shutdown disappear. 

The U.S. Commerce Department's report Thursday on how fast the economy expanded between July and September should provide a slightly clearer picture because the government shutdown didn't start until Oct. 1. Consensus estimates are for growth of 2 percent for the period, down from 2.5 percent in the second quarter but up from 1.1 percent in the first three months of the year.

But here, too, the shutdown will get in the way of assessing the pace of economic growth. The government's first estimate of third-quarter growth was delayed several weeks by the shutdown, so it no longer reflects the latest economic activity. More important, because of the timing of the federal lockdown, the data don't factor in the damage to the economy caused by the closure.

Bank of America Merrill Lynch analyst Ethan Harris estimates that declining consumer confidence related to the shutdown cut third quarter GDP by 0.5 percent.

"As long as we're seeing weakness in consumer confidence, the message is that we don't have an all clear at this stage," O'Sullivan said.

If the latest government labor and GDP figures are likely to prove murky in what they say about the economy, more recent measures paint a brighter picture. Manufacturing activity continued to expand in October, according to the Institute for Supply Management, which tracks industrial production. Service industries also grew. That suggests the turmoil in Washington last month did not significantly weaken growth.

Many economists and analysts expect the economy to pick up speed in the final three months of the year, with growth accelerating to roughly 3 percent in 2014.

American families also are slowly recovering as the economy rebounds from the 2008 financial crisis. "Balance sheets have now improved dramatically, the worst of the foreclosure mess is behind us and banks are slowing re-engaging," Harris said in a note to clients. "Moreover, we do not expect any new austerity or confidence shocks out of Washington next year. The economy should be able to leave intensive care next year."

Remember his forecast if Thursday and Friday's government reports give you the mistaken impression the nation's economic health is in steep decline.