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By Jason Stipp and Robert Johnson, CFA | 10-02-2013 11:00 AM

Shutdown Could Take a Big Bite Out of the Economy

A prolonged government closure could subtract half a percent from GDP growth based on the impact from the 1990s shutdown and the number of furloughed government workers today.

Jason Stipp: I’m Jason Stipp for Morningstar. As we head into day two of a government shutdown, what might the potential impact be of the government closure on economy? Here to offer his insights is Morningstar's Bob Johnson, our director of economic analysis. Thanks for joining me, Bob.

Bob Johnson: Thanks for having me.

Stipp: Before we talk about the potential impact of the shutdown on the economy, let's just define exactly what we mean by shutdown. What's closed, why is it closed, and why are some things still open?

Johnson: There are several things going on here. First of all, we've got the budget authorization, and there are many items that need funding every year that don't have an ongoing program and that have to be budgeted and approved. We've got no resolution to continue that spending or no new budget for that matter for the year that started Oct. 1, so that's why Oct. 1 was so critical. That's the government's fiscal year.

Now, there are certain things that have kept that from being a disastrous impact because you are allowed to keep essential employees and there are certain things that are pretty well-defined about what you can keep and what you can't. There are things like Social Security that are funded over a long-term program and aren't subject to any of the budget cutbacks, so those things, those normal payments go out. But, on the other hand, there are 800,000 to 900,000 nonessential government employees that are not working as of Oct. 1 and theoretically have no paycheck.

Stipp: That's 800,000 workers out of a total of 2.9 million workers in the government; 800,000 are not going to work right now as nonessential. So let's put that number into some context. We looked at the ADP report and that showed 166,000 jobs added, and that's quite a bit less than this 800,000 that aren't going to work right now.

Johnson: It's a really big deal, because it's 800,000 people without a paycheck. Now, obviously, they are not going to notice that right away, but just in the context of things, 200,000 jobs a month would be a lot. And to lose 800,000 all in fell swoop, that's a big deal. I don't think people have fully considered it.

Stipp: One thing we don't necessarily know is whether if the government opens up, [these workers] would get back pay.

Johnson: Right.

Stipp: We don’t know for sure that that’s going to happen, right?

Johnson: I think most managers of the government are telling people they have to be cautious about it. You can't assume you are going to get back pay. They happened to [get back pay] in the 1995-96 shutdown. But who knows what could happen, and people are going to have to be careful with their spending. That means poor retail sales and less manufacturing and all that goes with that. It's not good news.

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