Government Shutdown Could Derail Recovery

NEW YORK ( TheStreet) -- As the clock ticks down to the looming government shutdown, many analysts fear a rapid decrease in consumer confidence and spending could potentially derail the U.S.'s fragile economic recovery.

If lawmakers are unable to agree on a new budget measure before the current continuing resolution expires just after midnight on Saturday, federal departments and agencies will be required by law to execute a government shutdown.

Passage of an appropriations bill or an extension on negotiations would effectively forestall the shutdown, but the budget talks between Republicans and Democrats seem far from resolution.

If the government is shuttered, federal departments and agencies would have to comply with contingency plans set forth by the Antideficiency Act of 1870, and therefore would have to cease all operations, the Office of Personnel Management explained.

Hundreds of thousands of federal employees would be told to stop working, the economic effects of a shutdown would reverberate throughout the nation, and the longer it lasts, the more dire the financial repercussions, Gus Faucher, director of macroeconomics at Moody's Analytics, told TheStreet.

"If it starts stretching to two to three weeks, there is a potential for a negative impact on the economy, particularly through confidence," Faucher said. "If people feel that the government can't really handle this and can't get their house in order, then we could see consumers get a little bit anxious."

Many federal employees wouldn't be allowed to work, not even as unpaid volunteers for the government, and would be placed in a temporary non-pay status.

Only "excepted" employees would be exempt from the furlough, such as emergency workers, security personnel and air traffic controllers. But even the employees who are considered essential won't be receiving a paycheck until after the shutdown, which could very well cause a decline in spending, Faucher told TheStreet.

"We estimate that will hit take-home pay by about $2 billion per week. There's the potential there for cutbacks in spending because of that," Faucher said. "Federal employees who aren't getting paid could start getting nervous and they could cut back on spending as well."

The financial impact on federal workers remains uncertain, a federal employee told TheStreet on condition of anonymity, as many of them don't know when, or if, they will receive their next paycheck.

"It's kind of scary," the federal employee said. "I think it's really going to hit home for a lot of federal employees. We could be facing this type of issue permanently depending on what type of budget is passed."

The worker admitted to delaying buying Apple's ( AAPL) new iPad 2 due to the uncertainty surrounding the potential government shutdown.

"As a consumer that's something I am going to put off buying because I am not sure what's going to happen," the employee said, "and a lot of people have much more important things to worry about and are facing much tougher circumstances. We don't know if we will get paid at all."

The most recent government shutdowns occurred between late 1995 and early 1996 when Democratic President Bill Clinton and the Republican-controlled House and Senate were caught in a budget dispute.

Following the first six-day shutdown in November 1995, the Clinton administration estimated that the idled federal government had cost taxpayers about $800 million, including $400 million in wages to federal workers who weren't allowed to work, and another $400 million in lost revenue in the days that the Internal Revenue Service enforcement divisions were shut down.

The IRS would continue electronic tax-return processing this time, but paper returns, tax audits and refund checks would be suspended.

Maureen Gilman, the political director for the National Treasury Employees Union, said a shutdown would likely delay refund checks, The Wall Street Journal reported, because any work force disruption at the peak of tax season could slow processing times.

About a third of taxpayers file their returns between early April and Tax Day (this year it's April 18), which is 29.2 million tax returns, accounting for tens of billions of dollars in refunds, TaxMasters CEO Patrick Cox told TheStreet.

While only 30% of tax returns are expected to be filed by paper, all the refunds for those filings could be potentially be delayed by a few months, Cox said, which could have a "significant effect on the economy."

Most taxpayers don't put their refunds into their savings accounts, according to Cox. Instead, they plan to spend it.

"We're looking at a large number of people that planned to spend that money," Cox said. "If it doesn't show up, they won't have that money to spend. That's bound to have a significant effect on the economy."

The Federal Housing Administration would stop guaranteeing loans, spoiling time-sensitive mortgage deals, which could quickly upset the recovering housing market, while the Small Business Administration would also have to stop processing of loan applications.

"Independent economists are out there making clear what the impact on the economy would be on the uncertainty it would create for businesses," White House Press Secretary Jay Carney said in a briefing earlier this week. "That would obviously be harmful at a time when we are beginning to see some real progress in terms of economic growth, sustained growth, and sustained job creation."

A number of state programs funded by federal grants, including higher education, research, and law enforcement training, would likely be suspended, and all National Parks, such as Yosemite, Mount Rushmore, and the Grand Canyon, and monuments would close. Local industry and tourism would suffer as the effect of unpaid government contracts and closed national parks would likely result in the loss in revenue.

In the winter of 1995, the national parks reported they were forced to turn away about 2 million visitors during the shutdown. The number of shunned tourists could be much higher this time around, as the weather starts to warm up.

The Social Security Administration would most likely continue to send out benefit checks, but the White House has warned that no new applications would be accepted or processed in the event of a shutdown.

Some fear that the backlog of newly retired Social Security applications could eat into consumer confidence, but Faucher said the impact won't be as bad as some may expect.

"The Social Security recipients will eventually get their benefits," Faucher told TheStreet. "That may displace some economic activity and may delay it somewhat but I don't think it will be a substantial impact."

Aware of the potential negative effects a government shutdown would have on the U.S. economy, President Barack Obama has made it clear that he and his administration are currently working to find a solution agreeable to all sides.

--Written by Theresa McCabe in Boston.

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