What would happen if a U.S. government shutdown happens?

What would happen if a U.S. government shutdown actually happens?

The thought of it is already disturbing business operations and sending shivers throughout the markets.

Economists predict that economic growth in the fourth-quarter would reduce by 1.4 percent if a three to four week shutdown occured. St. Louis-based Macroeconomic Advisers LLC say that even a two week shutdown could cut growth by 0.3%.

Republicans and Democrats in Congress are still arguing on a budget to continue funding. The shutdown would cause temporary unpaid leave of many government employees (an estimated 36 percent of the federal government’s 2.1 million civilian employees), which directly subtracts from GDP.

If a shutdown occured the unemployment rate would increase from 7.3 percent around 7.8 percent. 

Moody’s Analytics chief economist Mark Zandi, said:

“You have a large number of federal workers who won’t go to work and get a paycheck. In the first few days, that won’t affect their spending much, but after a few weeks they start acting like they’re unemployed.”

Even if the shutdown is averted, government employees will still have wasted valuable time drafting contingency plans and rescheduling meetings for nothing.

Chief global economist at Economic Outlook Group LLC in Princeton, New Jersey, Bernard Baumohl, said:

“What we have is a political and not economic maelstrom. What everyone is watching right now is if the uncertainty is affecting consumer and business psychology, that they are postponing spending until they get more clarity about what’s going to happen in Washington.”

People are already on edge because the government will essentially run out of money if Congress fails to raise the debt ceiling.

Zandi said that the problem is beginning to seriouly worry people, because “if politicians can’t agree on a shutdown, they probably can’t agree on the debt limit.” Hitting the debt limit could risk default, leading to a “deep, dark recession.”

Recently, President Barack Obama demanded that House Republicans pass the Senate’s stopgap budget bill and extend the debt limit, telling them not to “burn the house down because you haven’t gotten 100% of your way”. The President added “Voting for the treasury to pay its bills is not a concession to me. No-one gets to hurt our economy… just because there are a couple of laws they don’t like.”

One wonders what effect this all might have on America’s credit rating. Standard & Poor’s (S&P) downgraded its credit rating of the U.S. federal government from AAA to AA+ on August 5, 2011. In June this year, S&P raised its outlook on the U.S. government’s credit rating to “stable” from “negative”, but left the nation’s rating at AA+.