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Friday, September 19, 2014

LIA's Monthly Economic Report: Federal Government Shutdown Economic Effects

The US economy suffered a significant economic setback from the Federal Government shutdown in October, with damage estimates amounting to $24 billion.  Fourth quarter growth estimates have been trimmed to 2.4%, down from 3.0% projections prior to the shutdown.

Risks of a future shutdown or public default appear minimal, however, given the intensely negative public reaction.  Strong housing sales and a stock market that appears to have weathered the storm from the shutdown are positive signs.  And the projected fourth quarter growth of 2.4% suggests that the recovery will continue, albeit at a somewhat slower pace.

Just 148,000 jobs were added in September 2013, well below analysts' expectations of 180,000.  In anticipation of a Federal Government shutdown and possible public default, it appears that employers held back on some of their hiring plans.  Nevertheless, this increase was sufficient to reduce the unemployment rate slightly to 7.2%.  This decline in unemployment reflected more people finding work rather than dropping out of the labor force.  Some 20,000 jobs were added in construction and 23,400 in transportation and warehousing. Government jobs rose by 22,000, which reflected growth in state and local hiring that more than offset cuts at the federal level.  The increase in state and local government hiring likely reflects an ongoing rise in tax revenues as the economy continued to improve modestly.  In contrast, 13,000 jobs were shed in the leisure and hospitality sector.

There is concern that the Federal Government shutdown and the threat of public default seriously dampened hiring in October as well (the October jobs report has been delayed until November 8).  But even if the October jobs figures prove to be discouraging, the shutdown is over and the public default never happened.  These events were immensely unpopular with the American people and likely caused significant loss in political capital.  In light of this, they are unlikely to be repeated.  Thus, one might reasonably anticipate that employment will improve in the coming months beyond October, consistent with overall improvement in the economy.

For complete report click here