The stock
market reaction to the 16-day government shutdown and threat of a default on
all U.S. government budget obligations (Social Security checks, interest
payments on government bonds, payments under contract to suppliers and contractors,
etc. etc.) was stunningly mild. In fact,
despite all the dire warnings and hints from the Democratic side of the aisle
that the markets should send a loud message to the Republican party, they never
did. Investors, for the most part, saw
the whole shutdown/default charade for what it was: something that a majority
of our elected representatives would eventually have to decide to work
out.
Indeed,
over the 16 day shutdown, the markets actually went up. Compared with the naked fear that the Fed would
stop intervening in the bond markets, the response to closing down the largest
payroll on the planet and threatening to send the global economy into a
tailspin registered not even a yawn.
Nevertheless,
there were costs involved. The Standard
& Poors organization recently calculated that the shutdown cost the U.S.
economy $24 billion--or about $1.5 billion a day. An estimate from Moody's Analytics similarly
put the figure at $23 billion--and this doesn't count lost productivity. Hundreds of thousands of furloughed
government workers are going to paid for their two-week-and-two-day vacation
even though they did nothing productive.
All those tourists who would have visited national parks and purchased
hotel rooms and restaurant meals didn't.
The ripple effect of thousands of government contractors twiddling their
thumbs hopefully is hard to calculate.
Perhaps the
biggest cost, if we ever get a final tally, will be the interest the U.S.
government has to pay on its debt. Bond
dealers were reporting weak demand for Treasury bonds at auction across the
full spectrum of maturities in October, as investors demanded higher yields to
cover the threat of default. Since the
recent budget deal only lasts until January 15, and the debt ceiling will be
again breached on February 7, 10-year government bond holders could conceivably
be looking at ten more opportunities for default before they get their money
back.
The U.S.
and world markets rose on the news that the government standoff had ended, but
that doesn't rule out a pullback at some point in the near future. Eventually, investors are going to realize
that shutdown and default debates could become an annual event. This is ironic, because, absent the
squabbling in Washington, the U.S. economy seems to be healing nicely--if not
quickly. Just before its staff was sent
home for the shutdown holidays, the Federal Reserve Bank of Chicago released
its latest report on the state of the economy, saying that consumer spending
continues to increase, business spending is up and manufacturing activity has
expanded. Most economists on the talking
circuit these days seem to expect that the U.S. economy will show 2% growth for
the year, down from closer to 3% estimates before the shutdown.
