The US economy is at risk of getting seriously dented due to the US budget dispute. Admittedly, the direct economic consequences of the government shutdown will probably be next to negligible. "However, the strain on the economy should be greater than the direct costs suggest—e.g. measured against the civil servants' loss of earnings," said Dr. Nils Jannsen, expert on the US economy at the Kiel Institute for the World Economy (IfW). "The US budget dispute has already led to a huge rise in general uncertainty towards US economic policy." The scale of consumers', businesses' and investors' uncertainty can be seen on the Economic Policy Uncertainty Index developed by US economists. The index already increased notably in September, after it had remained quite low the months before. The data currently available for October suggest that the uncertainty is continuing to rise sharply. To date, the historic peak was reached in 2011, when a rise of the debt ceiling was under discussion.
Empirical studies show that the economy can suffer a temporary, but serious, dent due to a rise in political uncertainty. Typical consequences of this uncertainty are that businesses cut down on investments and even private households refrain from making expensive purchases.
Without this uncertainty effect, it is estimated that the direct economic consequences of the government shutdown will lower the gross domestic product by 0.1 to 0.2 percent (running year's rate) per week for as long as this state of emergency lasts. The costs are, for example, calculated on the basis of the loss of earnings of the civil servants. Since the two parties were unable to agree on a budget for the new financial year beginning in October, the state may, for now, only fulfill its most essential duties—such as internal security or health care. Many other duties had to be suspended. Consequently, several hundred thousand civil servants have been given leave without pay.
The relatively low costs may have contributed to the fact that the parties have so far been unable to reach an agreement. Apparently, no party wanted to lose their bargaining position for the much more important negotiations on the rise of the debt ceiling. With the deadline for the rise fast approaching, the adverse consequences for the economy are expected to sharpen again, especially as the increasing uncertainty is also likely to increase the tension on the financial markets. Even if, as Jannsen still assumes, an agreement over the rise of the debt ceiling will be reached in due course, the US economy is still likely suffer a serious dent due to the budget dispute.
