Did The US Shutdown Affect The Global Economy? – Facts & Infographic

Did The US Shutdown Affect The Global Economy?

Did The US Shutdown Affect The Global Economy.

Shutdown Lowdown

After the US government went into a shutdown on 1st October, and only essential services functioned for 2 weeks, the US Congress voted on the night of 16th October, to avert a debt default and allow the government to work again. This is the first government shutdown in the United States since 1995/1996 under President Clinton.


President Obama has signed the bill passed by Congress into law, which will allow thousands of federal government workers to come back to work, after they were 'furloughed' for the past 16 days. The shutdown is estimated to have taken a $24 billion (£15 billion) toll on the US economy, and the question everyone's asking is: Did the US Shutdown Affect the Global Economy?


Structure of the US Political System

The US has a Bicameral Legislature with 2 Houses of Congress.


House of Representatives

Voting members = 435

Republicans = 232 and Democrats = 200

3 seats are currently vacant; there are also non-voting members.

Speaker of the House of Representatives (Republican): John Boehner



Voting members = 100

Republicans = 46, Democrats = 52, and Independents = 2

Senate Majority Leader: Harry Reid (Democrat)


The budget disputes arose over one central issue: the Affordable Care Act (ACA), aka Obamacare (the Affordable Care Act, introduced by President Obama, which seeks to provide health insurance to US citizens who cannot afford, or are not covered by, health insurance at present). The specific bill at the heart of the debate is the Continuing Appropriations Resolution, 2014. The resolution would provide funds to operate the federal government, including funds for Obamacare. The Republican-dominated House of Representatives amended the bill to remove ACA funds before approving it and passing it on to the Senate. The Senate Democrats refused to allow this to pass, removing the amendment, thus the deadlock. Representatives from both sides as well as President Obama have agreed to continue talks to find an agreement.


Republicans in the Congress are trying to use the whole country's $986 billion budget and the government shutdown as a way to exert control over the healthcare issue, leveraging their power to stop the government in order to push for changes to Obamacare


Potential for Default

More troubling than the shutdown itself are the potential problems that could arise if the government does not raise the debt ceiling in time. The US Treasury Department had set the deadline for the debt ceiling resolution for October 17. If it didn't happen the United States would have begun to default on its $12 trillion debts. In order to prevent defaulting on its foreign debt, the government cut down on other domestic payments, potentially affecting military, unemployment, and social security till the debt ceiling was not raised.


According to The Committee for a Responsible Federal Budget (crfb.org) all analysts agreed, the longer the shutdown, the greater the negative impact.


Bloomberg's Yalman Onaran predicted catastrophic consequences if there was a failure to raise the debt limit: “Failure by the world’s largest borrower to pay its debt -- unprecedented in modern history -- will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression.”


Despite several close calls throughout US history, its government has not actually defaulted since its early days in 1790, though some payment difficulties caused a delay in pay and what was called a technical default in 1989.


According to US Treasury Secretary, Jacob J. Lew, the US government will have $30 billion on October 17 in order to pay its debts. While this may seem like plenty, it may not even be enough to last one day – with costs potentially up to $60 billion. From October 17 to November 7, the government needs a total of $417 billion to make its payments.


Feeling the Effects around the World - The impact of the government shutdown can be felt within the US and globally.


Direct Effects


Some of the first in line to feel the shutdown were the 800,000 federal employees who were furloughed as a result of the shutdown, and over 1 million more who were on delayed pay. The furloughed employees were initially on unpaid leave, but Congress passed a bill to provide them back pay. The Defense Department deemed its employees essential, bringing them all back to work.Thousands have already returned to work. However, the furloughed employees could create a ripple effect on the economy. With the large chunk of people out of work, business such as childcare, and those the service industry, could soon feel the decrease in spending. The Washington Post reported that the shutdown could have a $200 million/day cost in Washington D.C., while Maryland predicts a loss of $5 million in taxes daily. The national economy was predicted to feel the effects if the shutdown lasted longer than 3-4 weeks.


It's tough to say what the overall effect has been on jobs, since the Department of Labor Statistics is not working. Experts say there will likely be an overall drop in job growth. Even the lack of employment data could have an effect on the economy, with the unknown circumstances surrounding funds, bonds, IRAs and 401Ks.



The shutdown also disrupted funding to major services, including military benefits, which were initially suspended. These death benefits, which were survivor benefits to spouses and families of slain troops, were restored on October 9, several days into the shutdown. New applications for benefits, such as Social Security and Medicare are not able to be processed.


Travel Industry:

National Parks were closed in the shutdown, hurting the US travel industry and potentially causing tourists to stay home or head somewhere else. Many tourists found their vacations ruined when they were unable to visit sites like the Statue of Liberty, and some tourist agencies have directed travelers to make other plans for their trips. Some National Parks, including the Grand Canyon, Statue of Liberty, and Mount Rushmore have reopened using state funds, which could hurt state budgets, while other states, including California, have decided not to reopen parks without federal funds.


These effects could be far reaching. The Grand Canyon National Park estimated that it lost $1 million every day it was closed, while tourists spend on average $2.7 million per day throughout the month of October. Economies surrounding these National Parks also suffer devastating effects, as the majority of their business comes from tourists traveling to the parks.


Fishing Industry:

The government regulates the amount of fishing allowed off its coasts. Without federal regulations, US fishermen were unable to continue their work. This could have severely damaged the US fishing industry, while simultaneously benefiting Russian fishermen.


Stock Market:

The government shutdown has also been closely tied to the financial markets, with fluctuations across the board. Though stocks fell over the first week, they rose again with talks of negotiations and resolutions of the debt-ceiling debate in the end of the second week of the shutdown. On Thursday (10/10), after Republicans moved towards a six-week extension, the Dow rose over 300 points, after weeks of struggling.


Investors are watching budget talks closely, weighing the risks and fearing the unknown. If the government does fail to fail to raise its debt ceiling and goes into default, the economy could be knocked right back into the recession it was finally crawling out of. With a default, securities would lose their value, and the government would not be able to bail out the big banks this time around.


Many investors will avoid the risk of holding securities during a default, which could be devastating. These fears of what will happen and lack of consumer confidence often causes people to pull out of the market.


Research and Education:

The shutdown woes have also hit research institutions that depend on federal funding and grants to continue their work. Some of those affected by this include the National Institutes of Health, National Science Foundation, and the Library of Congress.



The Centers for Disease Control and Prevention (CDC) are working at about 70% of their capacity, leaving voids in new research, such as the monitoring of current strains for vaccines. Salmonella outbreaks in major chicken processing plants have been blamed on the lack of government inspections at the facilities, and have led to a confirmed 317 cases across the country.


Market analysts say the 16-day partial shutdown of the government may have caused billions of dollars of damage to the U.S. economy. Wells Fargo analysts said the shutdown may have cut 0.5 percentage points off U.S. economic growth this year.


Stock markets responded positively the day after the deal was struck. On 17th October, the Standard & Poor's 500 stock index closed at a record high of 1,733 points. The Nasdaq composite index rose 24 points to 3,863.


Public Opinion


The government shutdown has also had a major effect on public opinion of the government, Congress, and the political parties. Before the shutdown, a CNN poll found that only about 33% saw President Obama as responsible for the potential shutdown, while 51% blamed the Republican Party. Earlier in the year, the latter number was just 40%.


A joint NBC/ Wall Street Journal Survey found an all-time low in public opinions of both the Republican Party and the Tea Party, while President Obama's rating has remained stable and is the highest of any figure in the poll. The Democrats have dropped just 3 points from 42 to 29 percent.

Overall, 53% of those surveyed blame the Republican Party, while 31% blame the Democratic Party, which is a worse split than during the last shutdown in 1995/1996.


Of those surveyed, just 17% think the US economy will improve in the next year (a decrease of 10 points since September), while 63% said they feel less confident about the economy because of the government shutdown and budget issues.


Global Effect


Almost half of US debt is owed to foreign powers, including governments, banks, and investors. China holds $1.3 trillion in US treasuries, followed by Japan with $1.1 trillion. Japan's exports could be in trouble, however, with the decrease in value of the dollar, though Japanese leaders are hopeful for an increase in the value of the yen as a result.


President Obama cut his trip to Asia short to deal with the government issues at home, missing the Asia Pacific Economic Cooperation (APEC) summit. To many, this decision could point to the United States not being serious about strengthening its ties in Asia, and increasing its presence in the Trans-Pacific Partnership.


The effect on Asian markets could be a positive one, however, with a 1.5% increase in Japan's Nikkei 225 stock average, and a 1.2% increase in Hong Kong's Hang Seng on Friday October 10.


Economists are closely observing the effects in Latin America, which has seen some major currency fluctuation. The Mexican peso hit a monthly low, demonstrating how closely tied its economy is to the United States. Mexico may also feel a lowered US demand for Mexican products.


On the other end, the Brazilian real rose upon speculation of the delay of the US stimulus program, pointing to its growth independent from the United States.



Gold Bullion dropped to a 3-month low when negotiations began to move toward resolution. Gold has already dropped 24 percent this year and is heading toward its first annual loss since 2000, and gold futures for December delivery dropped 2.2%, settling at $1,268.20 an ounce on the Comex last week. Some investors have lost faith in gold's value with concerns that the federal government may slow its bond purchases, which reach $85 million monthly. Settlement of these negotiations could put the economy back on track.


As Republicans and Democrats reached consensus on averting the debt sealing, and the US government re-opens, analysts warn that this deal will only keep the government open till 15th January and lift the debt ceiling till 7th February 2014. The eyes of the world remain on the US Government and the Republican Congressmen as they try to find a more long-term solution to avert another shutdown.

















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