Shutdown effects on economy may be slim

(MoneyWatch) How bad will the economic impact of the government shutdown be? While economists say that largely depends on long the closure lasts, for now they expect the damage to be minimal.

The shutdown "hurts consumer confidence, and it doesn't help with cash flow, but in terms of financial impact it's going to be made up when the government reopens," said Stuart Hoffman, chief economist at PNC Financial Services Group. "The biggest problem is people can see what a dysfunctional government we have."

Research firm IHS Global Insight estimates that a one-week shutdown would shave off less than a tenth of a point from fourth-quarter GDP. Roughly 800,000 federal employees went on furlough on Tuesday after Congress failed to pass a bill to fund the government.

"The spending habits of government employees probably would not change if the shutdown was short-lived, particularly if they believed that they would receive back," IHS added. "Meanwhile, incomes would be maintained for Social Security beneficiaries. Medicare payments would also continue, so spending on health care services would not be harmed and hospitals and doctors would receive payments."

Hoffman noted that furloughed government workers can apply for unemployment insurance payments and will be entitled to government checks. Then, when the shutdown ends and they are paid retroactively, they must refund the government unemployment benefits with money from their regular government salaries.

But in the meantime, volatility among some sectors on Wall Street showed just how nervous investors are about the budgetary uncertainty. The worst performing sector in the stock market today, for example, was military contractors, among the companies with an umbilical cord attached firmly to mother government.

In mid-day trading, Boeing (BA) was down more than 2 percent, Lockheed Martin (LMT), L-3 Communications (LLL) and General Dynamics (GD) all were down 1.5 percent in mid afternoon trading.

Meanwhile, some big companies that do business with the government are warning that an extended shutdown could force them to slow production. United Technologies (UTX), which makes helicopters and other aircraft for the military, said Thursday that it may furlough more than 5,000 workers if the government remains shuttered next month. The company said the furlough of federal defense industry inspectors means it can't get the necessary government approvals for certain of its products.

Hoffman said they too had little to fear, long term, from the shutdown. Any work suspended will be resumed.

Although such work is likely to resume after the budget impasse ends, the turmoil for manufacturers and other companies comes as the economy continues to limp through an already uneven recovery. Forecasting group Macroeconomic Advisors said its economists have marked down their projections for fourth-quarter GDP growth to 2.1 percent, from 2.6 percent.

Other sectors of the economy are also seeing flagging results, although many economists expect GDP growth pick up in early 2014. IHS noted that non-manufacturing industries expanded at a slower pace in September after a more robust July and August. "Significant declines in the business activity and employment sub-indexes are concerning, though each remains comfortably in expansion territory and is fresh off recent peaks."

Meanwhile, everyone from Goldman Sachs's (GS) Lloyd Blankfein to IMF chief Christine Lagarde have warned that the big show is not the shutdown but a default on the nation's debtif members of Congress refuse to raise the nation's borrowing limit. Were that to occur, the country would be entering unknown territory, denting the value of the dollar, prompting a potential spike in interest rates that could make the government's debt far costlier to repay and inviting calamity in equity markets.

The Obama administration sounded its own alarm about the risks of breaching the debt ceiling, when the Treasury Department released a report detailing what could happen in a default. "A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, and U.S. interest rates could skyrocket, potentially resulting in a financial crisis and recession that could echo the events of 2008 or worse," it said, referring to the 2008 near collapse of the world economy after the failure of Lehman Brothers.

"The president and Treasury said that if the U.S. is foolish enough to default on its credit rating that it has been building for more than two centuries -- throwing away all that good creditworthiness -- you might have to have a real ugly message from the voters and the markets that this is suicide," Hoffman said. " I just don't think there are enough crazies around to do that, but there may be enough to get you up to the edge of the precipice."