Congress failed to strike a deal late Monday that would have kept the government funded, pushing the government to partially shut down on Tuesday and forcing about 800,000 federal workers off the job. (The last shutdown took place in early 1996.)
The current shutdown means that most nonessential federal programs and services are suspended — such as national parks and museums, NASA and the Environmental Protection Agency — while military employees, air traffic controllers, food inspectors and postal staffers keep working.
Mid-day Tuesday, President Obama delivered a speech in the Rose Garden, urging lawmakers to pass a budget that end the impasse. “We’re better than this,” the president said.
Still, some experts couldn’t contain their frustration at the gridlock in Washington.
Citigroup (C) chief economist Willem Buiter compared the United States to the “Land of Oz run by the Munchkins” during an interview with CNBC on Tuesday. If (or when) the stock markets become concerned about the debt ceiling and the chance of a sovereign default, the shutdown “could become an economic disaster,” Buiter said.
On Monday, Standard & Poor’s warned that a deal must be reached by Oct. 17 or the Treasury would likely miss debt repayments and default on the country’s roughly $17 trillion national debt, which would hurt the country’s rating.
“If the U.S. is to default on even a small portion of its debt, it could pull the rug under the global economy,” explained Buiter on CNBC. “U.S. sovereign debt is the linchpin of the global economy.”
The way out of such an impasse, says Raymond James (RJF) economist Scott Brown, is for the Senate to come up with a bill that can win a majority vote in the House, perhaps a short-term continuing resolution or longer-term agreement.
“In the meantime, the impact on the economy and the financial markets will be a function of how long the government stays shut,” Brown noted. “Debt ceiling negotiations loom following any agreement on the budget.”
Partial shutdowns of the federal government cost the U.S. at least $300 million a day in lost economic output, according to IHS Global Insight. Furthermore, the research group projects that a weeklong shutdown would push its forecast of 2.2% annualized growth in the fourth quarter down to 2%.
Analysts at Janney Montgomery Scott anticipate a 21-day shutdown might weaken growth by 0.9 to 1.4 percentage points, according to a Bloomberg report.
The ’96 shutdown was unpopular with voters, says Wells Fargo Advisors chief macro-strategist Gary Thayer, and hurt Republicans in the next election cycle.
“Therefore lawmakers probably want to avoid a prolonged shutdown that could do similar political damage ahead of next year’s midterm elections,” Thayer wrote in a report on Tuesday.
Given the political pressure on Congress to make a deal, Wells Fargo Advisors is not changing its short-term economic or market outlook, according to Thayer.
“This could be a short-term event,” he explained. “But a long-term shutdown would obviously have a negative impact on the economy, which could change our economic outlook and stock market targets.”
Other observers agree.