October 2, 2013

Government Shutdown Threatens Growing U.S. Wealth

Brinkmanship in Washington jeopardizes U.S. families’ net worth and higher earning power

U.S. household wealth could take a hit if Washington's lawmakers turn out the lights. U.S. household wealth could take a hit if Washington's lawmakers turn out the lights.

U.S. households are getting wealthier and earning more, but the government shutdown could put those gains in jeopardy.

While last week’s economic data shed new light on the growing net worth of U.S. families along with a rise in personal income, analysts fear that brinkmanship in Washington over the debt ceiling and Obamacare threatens that growth.

Before Congress failed to pass a measure to fund the government, shutting down nonessential operations Tuesday morning, several analysts weighed in on how such a closure would affect Americans' wealth.

“A shutdown would slow the expansion because output lost when workers are furloughed subtracts from gross domestic product,” wrote Jeanna Smialek and Ian Katz in a Bloomberg analysis on Friday. “The combined prospect of a budget standoff between the White House and Congress and haggling over the debt ceiling could have a bigger impact on the economy as businesses hold off on investment and households delay spending.”

Frank Fantozzi, CEO of Planned Financial Services, a Cleveland, Ohio-based firm affiliated with LPL, agreed that U.S. GDP could take a hit if the government shuts down.

“If the government stops spending money, it will bring down GDP, and this is a concern that the Federal Reserve has raised,” Fantozzi said in a phone interview on Friday. “One of the reasons the Fed has cited is that because GDP is 2% or a little less, we’re approaching a stall rate. If the government shuts down and they can’t put money into the system, the fear is that paltry GDP rate will go to nothing and the economy will stall.

“Theoretically that can happen, though I have my reservations that we’ll see a government shutdown that puts us over the cliff.”

Shutdown Casts Gloom on Sunny Data

The U.S. Bureau of Economic Analysis reported Friday that personal income in August increased $57.2 billion, or 0.4%, as personal consumption expenditures increased $34.5 billion, or 0.3%. Private wages and salaries, meanwhile, increased $28.5 billion in August.

Further, on Wednesday, the Federal Reserve reported that household net worth was $74.8 trillion at the end of the second quarter, about $1.3 trillion more than at the end of the first quarter — putting it at the highest level since the Fed began keeping records in 1945.

But now, brinkmanship is back. Until recently, the economists at Bank of America-Merrill Lynch had been cautiously optimistic about a replay of the spring, but last week, they raised the probability of a shutdown to 30% from 15%.

“After a welcome hiatus, brinkmanship battles have returned to Washington,” BofA-Merrill global economist Ethan Harris wrote in a comment published Friday. “Now two new battles loom: there needs to be a continuing resolution by the end of this month and the debt ceiling needs to be raised sometime in mid-to-late October.”

Morgan Stanley analysts Vincent Reinhart and Ellen Zentner lament the timing of the budget battle — just as U.S. consumers are finally getting on their feet.

“Only in the past three months has consumer confidence in the U.S. finally reached a level considered historically 'normal' in recovery,” Zentner wrote in a note to clients titled “Households Finally ‘Feel’ the Economy.” Yet in her report with Reinhart, Zentner said there would be a direct arithmetic impact on GDP from a shutdown.

“Compensation of nondefense employees and civilian defense employees makes up about one-fifth of real federal spending and about 1.5% of GDP. Eliminate a third of that in a shutdown as nonexempt workers stay home, and GDP is haircut 0.5%,” Zentner and Reinhart wrote. “Annualized, this reduces quarterly GDP growth by around 0.15 percentage points per week of shutdown. Even if ex post legislation makes up the missed pay and therefore avoids a hit to personal income, the real numbers will be gone for good because the hours worked will not be made up.”

A shutdown would mean more than just a furlough of all but essential government employees, OppenheimerFunds Chief Economist Jerry Webman wrote in a Sept. 3 comment, “When Doves Cry.” It would mean a billion-dollar hit to the U.S. economy, Webman warned.

“Shutdowns can affect hundreds of thousands of workers and contractors, not to mention civilians awaiting approval of various government applications (including small-business loans), businesses that rely on tourism, and so on,” Webman wrote. “The costs of past government shutdowns to taxpayers and private businesses have extended into the billions of dollars. So, although the conventional wisdom may be that a shutdown is no big deal, it is something that the economy just doesn’t need right now.”

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Check out Head Start, Meals on Wheels Among Programs Bruised by Budget Impasse on ThinkAdvisor.

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