The Lasting Implications of the US Controversy

October 23, 2013

Despite the US saga concluding, the USD is continuing to decrease in value. Economists are now looking towards what longer term implications the shutdown may have on the US economy.

In my opinion, it looks like the fallout has only just begun.  

The shutdown cost the US economy $24 billion.  Similarly, Standard & Poor’s estimate that at least 0.6% has been shaved off the United States 4th quarter GDP. Others predict that it could really be at least 0.8%.

The current agreement will only keep the government open until January 15th, with the debt ceiling being temporarily raised until February 7th.

Does this mean that in three months time, we are going to have to deal with all this drama again?   

President Obama recently stated that there was no economic rationale for this fiasco and that it had done completely unnecessary damage to the US economy.

Let’s take a look at what long term damage may have really been caused.

The lasting impact on tourism:

Tourism is a very important aspect of the US economy. In fact, tourism is the United States number one service export, contributing towards 8% of US GDP.

However, during the government shut down, the US tourism industry lost $152 million per day. National parks alone lost $76 million per day. This is money that can’t be recovered.

Does this mean that national parks are now going to cut back on hiring? How about other sectors of tourism, such as hotels?

We must also ask the hypothetical question, if the US government has only come up with a short term solution and the government shuts down again on January 15th, will tourists still book holidays to go to the United States during that period?    

It has not been fully calculated how much damage the shutdown has done to local hotels, restaurants, local souvenir shops and transport companies, among others.

The government duels have destabilised unemployment

Macroeconomic advisors have suggested that previous government disagreements over the use of their budget have pushed the unemployment rate up by 0.6%. They also estimate that the latest shutdown could hold back job creation by 900,000 jobs.

The government controversy has created unneeded uncertainty. Businesses may now be worried, moving forward, and are reluctant to embark on new projects. Projects such as business expansion may not go ahead.

If this were to be the case, it means jobs are not being created and corporations may downscale on hiring.  This could negatively correlate to future Non-Farm Payroll releases.

After all, initial jobless claims for last week equalled 358,000. This is far higher to what they were averaging before the government shut down.

Previously, anything above 330,000 was seen as bearish for the USD.

Consumer confidence:

During the past week, consumer spending at chain retail stores fell by 0.7%. Mortgage applications also dropped by 5% and auto sales depreciated by 2%. Consumer expenditure did decrease and we are unsure how much substantially US consumer confidence was dented by the government crisis.   

It is self-explanatory that with the Christmas period now quickly looming, this is the wrong time of the year for consumer confidence to decrease. We may witness additional Christmas hiring slowdown as a result of these statistics.   

Any decrease in consumer confidence will cause anxiety that this year’s Christmas period may not be very lucrative for US retailers. This would reflect poorly upon future retail sales statistics, and prove bearish for the USD.

In conclusion, although it has been suggested that the government shutdown cost the US economy $24 billion, I believe that when we look at all the future ramifications this can have on other aspects of the US economy, the losses could be subsequently more than the figure that has previously been mentioned in the media.

In my opinion, other aspects of the US economy are going to suffer throughout the final quarter of 2013 because of the worry the controversial government shut down has had on consumers.

The future release of US economic data could be negative throughout the next month or two, and this will lead to another drop in the value of the USD.

Written by Jameel Ahmad, Research Analyst at Blackwell Global.
Follow Jameel on Twitter @JameelAhmadFX.

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