How the Shutdown Hammered the U.S. Economy

America’s deficit was shrinking and its economic outlook was improving. Enter politics. REUTERS/Carlo Allegri

Before the latest congressional melee over government spending, the U.S. federal deficit was shrinking and seemed poised to shrivel even more in the near future. As a percentage of the nation's gross domestic product, the cash shortfall had dropped by half in the past two years, according to Standard & Poor's senior credit analyst Marie Cavanaugh, who heads the ratings team in charge of assessing the U.S. credit rating.

In other words, the United States was on track to slash its deficit and enjoy the spoils of its growing financial recovery – until the shutdown, which has socked the economy in the nose and soured investor confidence everywhere.

"Earlier this year, we raised our outlook for the U.S. from negative to stable based on the ability of Congress to negotiate its way out of the fiscal cliff, the nation's strengthening economic recovery and the fact that the nation's deficit had fallen by half of the 2011 level," Cavanaugh told Newsweek just before Congress cobbled together a last-minute deal.

Now the same ratings agency estimates that the government shutdown knocked $24 billion out of the U.S. economy in just two weeks. That is more than $1.5 billion a day.

Essentially, the fighting over spending leaves America with less to spend.

"The bottom line is the government shutdown hurt the U.S. economy," stated S&P's chief economist Beth Ann Bovino, on the heels of an eleventh-hour budget compromise that effectively delays key fiscal decisions until next year. "In September, we expected 3 percent annualized growth in the fourth quarter, because we thought politicians would have learned from 2011 and taken steps to avoid things like a government shutdown and the possibility of a sovereign default." (In 2011, consumer confidence hit a 31-year low; just this week a Gallup poll similarly showed investor confidence dropping to its lowest level in almost two years. Probably not a coincidence, as both polls took place during congressional standoffs.)

S&P, which has been the only ratings agency to slash the nation's top-flight credit rating (also in 2011), now expects this year's fourth quarter GDP to straggle in at closer to 2 percent.

That's if the U.S. is lucky. With full expectations that consumer confidence will continue to plummet amid the "short turnaround for politicians to negotiate some sort of lasting deal," Bovino predicts, "If people are afraid that the government policy brinksmanship will resurface again and, with it, the risk of another shutdown or worse, they'll remain afraid to open up their checkbooks. That points to another humbug holiday season."

Cavanaugh says the agency estimates that for every week in which the government was shut down, roughly 0.3 percent of the nation's GDP was destroyed. Not really good thing for a country that, until recently, "was running one of the highest deficits the world has seen since World War II, as a share of the economy," according to Nikola Swann, Cavanaugh's predecessor and the credit analyst who led the team that voted the U.S. credit rating down back in 2011. The U.S. rating remains in the second-best slot, behind Sweden, Denmark, Finland, Norway, Germany, the Netherlands, Hong Kong, Singapore, the United Kingdom, and Canada.

Swann, who tracked U.S. fiscal health for some time, traces much of the trouble back to 2001, when the September 11 attacks led to a downturn in the nation's economic growth and spiraling spending in the lead-up to the war on terror.

The U.S. did begin to recover by 2007, he says, but then it was buffeted by the financial crisis.

By 2009, the nation's cash deficit – the annual gap between spending and revenue as a percentage of its GDP – had swelled to 11 percent, he says. Compare that to a surplus of 3 percent of GDP in 2000. At present, the cash deficit has eased to under 5 percent, Cavanaugh says, but remains at the high end.

"Remember, the Clinton administration benefitted from very high rates of economic growth, real rates that were around 3 percent to 5 percent of GDP," Swann says. "We increased spending but never got back to the high growth rates."

Bovino warns the U.S. still has much to lose if its fiscal game of chicken doesn't end.

A default, Bovino says, "would be devastating for markets and the economy and worse than the collapse of Lehman Brothers in 2008" and "put the economy in a recession and wipe out much of the economic progress made by the recovery from the Great Recession.

How the Shutdown Hammered the U.S. Economy | U.S.