ANALYSIS: Economic Hit From Impasse Could Endure

In the grand scheme of the $16 trillion U.S. economy, the nearly three-week government shutdown and standoff over the debt ceiling may not look like much. Analysts estimate the loss at tens of billions of dollars, and reckon that much of that will be recouped in the next quarter.

But the extent of the economic harm goes well beyond what can be immediately tallied: lost business deals and disrupted research; a hit to consumer confidence; and what many see as permanent damage to U.S. credibility around the world.

These setbacks may prove to be far more costly, lasting and painful than a few months’ worth of slower growth.

“It’s not that this episode causes lasting damage; it’s the succession of episodes,” said Peter Morici, a University of Maryland business professor, referring to federal lawmakers’ repeated down-to-the-wire fights over the budget.

The end to the shutdown Thursday caused a scramble to restart government services and programs, in the hopes of mitigating any long-term consequences, particularly for government-funded scientific research.

In one high-profile case, the National Science Foundation said it would resume its halted studies in Antarctica. But Ross Powell, the scientist in charge of one project there researching the environment below the ice, said he wasn’t sure whether his team could salvage some of the planned work.

“It’s all dependent on how much time we can get in the Antarctic and how much gear we can get down there,” Powell said in an interview Thursday from his office at Northern Illinois University in DeKalb, Ill.

It may be weeks or months before officials can get a clear assessment of the status of various projects. But it’s almost certain that some data and work will be lost for good, given the importance of continuity in scientific research.

The picture is similarly murky for the nation’s economy, as businesses and workers alike adjust to a new and elevated level of doubt. The Federal Reserve’s report on the economy this week repeatedly cited uncertainty as a factor holding back investments and hiring in the past two months.

Some analysts had been expecting job growth to accelerate to 175,000 a month in this final quarter, after slowing in the summer to about 150,000. Now they’re not so sure. Many economists have slashed economic growth forecasts for the fourth quarter, and it remains to be seen how quickly activity will bounce back.

Some small businesses that were struggling before the shutdown may never recover. Others are having to make do with less.

John Bailey, a Pennsylvania motor coach and tour operator, is still smarting from the cancellation of a middle school’s planned trip to Washington last week.

“We worked hard to gain that business and put that business in our books, and the government took it away,” said Bailey, the president of Bailey Travel Service in York, Pa. “That business you lost, you’ll never get it back.”

Beth Ann Bovino, Standard & Poor’s U.S. chief economist, estimated that the shutdown and debt-limit standoff cost the economy $24 billion in reduced activity in the final three months of the year. She said a significant amount of that money, spending and investment eventually will be recovered, as furloughed workers receive their back pay and other problems caused by the shutdown – such as delayed loan applications – get resolved.

In the wake of the last federal government shutdown, in 1995-96, as well as after the previous debt-limit showdown in the summer of 2011, economic growth rebounded sharply in the quarter after the stalemate ended.

But the economy in the mid-1990s was fundamentally stronger. And in 2011, the debt-ceiling increase was large enough to last through the end of 2012. This time, with another government spending deadline Jan. 15 and the debt limit extended only until Feb. 7, the recovery from the recent crisis could very well be delayed, Bovino said.

“When all the federal workers get their back pay, they may not be as readily heading out to the mall,” she said, noting the next round of budget negotiations probably will be making headlines during the year-end shopping season.

“They will eventually spend, but they will be hesitant because of fears there will be a shutdown in just a few months.”

Although this latest crisis was resolved at the last minute, the fact that another threat looms in less than three months could cause businesses and consumers to be more cautious.

“It was one of the most dramatic changes in economic confidence in a short period of time we’ve seen,” said Frank Newport, editor-in-chief at Gallup, referring to the sharp fall in consumer sentiment during the latest fiscal battle.

Alan Pentz, a government consultant in Washington, D.C., thinks that federal contractors will try to protect themselves in the future. He sees many setting aside larger reserves.

“Long term, people are going to be more conservative and hold back funds,” he said, noting that this is money that would otherwise be invested or used for productive purposes.

Some economists and investors on Wall Street worry the latest default threat could lead to higher borrowing costs – not just for the U.S. government but also for consumers.

U.S. Treasury bonds are the bedrock of the global financial system; for decades, investors have had no reason to doubt T-bills’ status as something as good as cash. Now, there is some question as to whether their interest rate, or yield, would remain synonymous with no risk.

“Is there a risk-free rate? I don’t know,” said Joe Lynagh, a portfolio manager overseeing money market and cash investments at T. Rowe Price.

The U.S. already is paying a price for nearly breaching the debt ceiling. Yields on four-week T-bill rates jumped as President Barack Obama and Congress battled over raising the debt ceiling this week. By Tuesday, rates on these bonds jumped to 0.34 percent – a huge leap from 0.02 percent in late September.

Although yields have since retreated, the spike took its toll. The U.S. will have to pay $114 million in additional interest, according to an estimate by IHS Global Insight.

“Even with the deal to avoid a default, the damage has been done by the fact that we have had a debate questioning whether the U.S. will pay its bills,” Larry Fink, chairman and chief executive of investment giant BlackRock Inc., told analysts Wednesday.

Although few average investors pay attention to this corner of the bond market, short-term T-bills play a crucial role in greasing the wheels of finance. Interest rates paid by the federal government bleed into rates consumers pay to borrow to buy cars and homes.

“There’s costs here for everybody,” said Lynagh at T. Rowe Price.

Another concern is that the latest episode may accelerate a long-term trend away from Treasury bonds and the U.S. dollar as the world’s primary reserve currency. Central banks from around the world may stock up on other safe investments, such as bonds issued by the Eurozone or Japan.

For now, the US’s luster – while tarnished – still outshines that of all other countries. Investors have relatively few alternatives. But the latest ordeal may have further chipped away at America’s reputation. And the risk has increased that investors may demand that the U.S. pay higher interest because of new default risks.

On Thursday, the Chinese credit rating agency, Dagong Global Credit Rating Co., downgraded U.S. debt to A- from A, saying, “The government is still approaching the verge of a default crisis, a situation that cannot be substantially alleviated in the foreseeable future.”

Major American credit rating agencies did not follow suit, and international investors were not likely to take the obscure Chinese agency’s move seriously. Nonetheless, analysts said such actions and comments certainly won’t help America’s standing or influence in the global arena.

“There are countries that would like to believe the Chinese line,” said Morici, the Maryland professor.

(Tangel reported from New York.)