The two-week long partial shutdown and the looming crisis over a possible debt default by the U.S. government has already harmed the U.S. economy. Its impact will be felt long after the fiscal soap opera that has paralyzed Washington, D.C. fades from the headlines.
Not surprisingly, the travel and tourism sector has been hit hard since most national parks are closed because of the shutdown. According to the U.S. Travel Association, the industry loses $152 million in economic output because of the government shutdown, affecting as many as 450,000 workers. This is potentially bad news for a range of companies such InterContinental Hotels Group, the parent company of Holiday Inn, and airlines such as US Airways.
A survey released early Tuesday by the National Association of Convenience Stores found than 23% of respondents said they were “very pessimistic” about the economy despite a 22-cent decease in the price of gas over the past month. That’s the highest level it’s been this year. Stressed consumers, of course, will spend less money during the upcoming holiday season.
Retailers such as Wal-Mart Stores (NYSE:WMT), Target (NYSE:TGT) and Family Dollar (NYSE:FDO), have complained for months that cautious consumers were hurting their profits. They were hurt by the delays of tax refund checks caused by the fiscal cliff fight. Headlines about a possible government defaults certainly aren’t going to help matters.
More than 800,000 federal workers worker along with thousands of government contractors are staying home waiting for the phone to ring to tell them to come back to work. In some cases, workers have gotten good news in agencies such as the Pentagon. Lockheed Martin Corp. (NYSE:LMT), the largest defense contractor, and United Technologies (NYSE:UTX), the parent company of Sikorsky helicopter, have scaled back on their plans to furlough workers.
Though media reports have repeatedly said that the odds of a default were small, investors had good reason to be nervous. Until recently, Congress routinely raised the debt ceiling on a bipartisan basis without much controversy. Even the minute possibility that the U.S. wouldn’t honor its debts has scared people around the world. IMF head Christine Lagarde warned yesterday that U.S. lawmakers were risking causing “massive disruption.” That’s a kind way to describe economic Armageddon.
Government officials and private companies are being forced to at least plan for the possibility that the deeply divided Congress will be unable to come together to raise the federal government’s borrowing capacity.
“This has us pretty nervous; it’s just a mess,” said John E. Nixon, Michigan’s budget director, told the New York Times. “We are taking it very seriously, and we have our agencies preparing contingency plans.”
Unfortunately, it’s hard to plan for something that never has happened and that even the most cynical observers of Washington ever thought would occur because it puts the government in such a horrible situation. This has already created gigantic headaches.
Thousands of low-income parents were left without childcare after Head Start, widely considered one of the most effective government programs, was forced to shut its doors. Centers in six states were able to reopen thanks to a $10 million donation from Houston billionaire John Arnold and his wife Laura. Arizona, Utah and New York funded the reopening of such iconic sites as the Grand Canyon, Bryce Canyon and the Statue of Liberty.
House Speaker John Boehner told reporters Tuesday in Washington that House Republicans are committed to moving forward in a bipartisan way.
“I have made clear for months and months that the idea of default is wrong,” he said.
Unfortunately, people have heard this many times before.
The Bottom Line
When it comes to the shutdown, investors need to hope for the best but prepare for something so awful that they have difficulty imagining it taking place. Even if the unthinkable doesn't happen, the fact that the Congress came so close to pushing the economy into a fiscal abyss won't soon be forgotten.
Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.