World and Nation

Government shutdown might damage economic recovery

It’s not just an estimated 800,000 federal employees who would feel the financial pinch of a government shutdown.

Among the people anxiously waiting to hear if Congress can reach a budget deal are front desk clerks at the Ahwahnee Hotel in Yosemite National Park, manufacturing executives whose companies supply goods to federal agencies, bank loan officers who make mortgages guaranteed by the Federal Housing Administration, and Wall Street analysts who depend on a steady flow of government data.

The federal government is, after all, a very big business, and temporarily pulling the plug would disrupt many other businesses.

President Barack Obama has warned that the looming shutdown could stall the already fragile economic recovery by choking off much-needed paychecks to workers and introducing another level of uncertainty in an already uncertain world.

Economists are divided as to how much the shutdown would rattle the economy. Of course, some of it depends on how long any stoppage lasts. If Congress agrees to a budget quickly, it might be just a few national park visitors who are disappointed over the weekend. But if the hiatus stretches to a week — or to nearly three weeks as it did in 1995 — then the ripples could fan out.

When the government shut down for 20 days in late 1995, the nation’s economic growth was slowed by as much as a full percentage point in that quarter, according to James F. O’Sullivan, chief economist at MF Global. The effect was temporary, he said, with the economy adding about that much in the following quarter.

Sullivan said that over the three months that included the shutdown, federal spending fell 14.2 percent from the previous quarter, before rebounding 8.6 percent in the following quarter.

David Greenlaw, U.S. economist at Morgan Stanley, said other factors might have held back growth in late 1995, including a 10-week strike at Boeing. This time around, the economic expansion faces a number of challenges, including turmoil in the Middle East; concerns about supplies coming from Japan after its earthquake, tsunami and nuclear crisis; and millions of unemployed Americans looking for work.

The federal government is such a large customer that many companies, like Booz Allen or Verizon, could be forced to cut back on workers’ hours, although these two companies and many others declined to comment on their plans on Thursday.

At the national parks, many of the hotels and restaurants are operated by private concerns that will most likely suspend some workers if the parks are closed. Without their weekly paychecks, those employees could tighten their belts, causing further fallout for grocery stores or other retailers who may see sales slow.

Economists as well as Wall Street analysts and investors fret that the spigot of data churned out by the government could stop if the shutdown extends into next week. Reports scheduled for next week include retail sales and inflation data.