In Default Delay, Government Workers May Lose Their Biggest Advocate

Markets spiked on hopes that a default threat might be put off by more than a month.

Specialists Peter Kennedy and Michael Gagliano, foreground left and right, work at their posts on the floor of the New York Stock Exchange, Thursday, Oct. 10, 2013.
By SHARE

Investors, rejoice. Government workers, settle in for the long haul.

Stocks jumped on Thursday on news that the threat of default may soon be pushed into the future. House Speaker John Boehner announced House Republicans would offer a six-week extension of the debt limit, in exchange for negotiations with the White House on how to further raise the debt ceiling and end a partial government shutdown. Stocks soared shortly after the opening bell and ended the day well ahead: the Dow Jones Industrial Average jumped by 323 points, or nearly 2.2 percent during the course of the day.

[READ: Republicans Pivot from Obamacare, For Now]

Throughout the shutdown and debt-ceiling impasse, markets have been seen not only as a gauge of investor sentiment but another actor putting pressure on lawmakers to reach a deal. If the debt ceiling – and the potential economic catastrophe it could trigger – are pushed back by more than a month, it would give markets a reprieve, but would also mean less pressure on lawmakers to make a deal that would avert a shutdown.

"If financial market fears abate, there's less pressure on the political system to make progress," says Craig Alexander, senior vice president and chief economist at TD Economics.

 

Though uncertainty of any type does rattle markets, the shutdown has tended to spook investors far less than the ceiling. That makes sense, as defaulting on the nation's debt could potentially send the country into recession, as many economists have predicted.

"I think they're not that concerned at all, at least in the short term, about government workers not working," says Mark McCarron, chief investment strategist at Drexel Morgan Capital.

Though the shutdown could itself hurt economic growth, investors tend to believe that government workers will eventually get their back pay for all the days of work they miss, McCarron says.

[MORE: Lew Pushes for Debt Ceiling Hike, Cautions on Prioritization]

That means investors believe "the impact on spending, consumer spending and such, is going to be delayed but not eliminated," he adds.

It's not just investors who don't see the shutdown as being a major blow to the economy; most economists agree that, while an inconvenience and even a hardship for the hundreds of thousands of federal workers affected, the shutdown won't hurt the broader economy badly.

"My estimation is that if it lasted for about two weeks, it would lower economic growth in the current quarter by 0.2 or 0.3 percentage points," says Alexander. "It's certainly a negative, and it's happening at an unfortunate time, but it's not going to derail the recovery."

Alexander had estimated that fourth-quarter economic growth would be in the 2 to 2.5 percent range. However, every passing week brings the estimate down. If the shutdown were to drag on for a month, that could shave a full percentage point off of the fourth-quarter GDP growth rate, potentially bringing it well below two percent – a crawl, especially for an economy working its way through a recovery.

However, investors aren't just looking at numerical indicators, he adds.

[ALSO: In Ohio, Tea Party Proud of Boehner]

"It's not just about the GDP number; it's about what are the prospects going forward," says Alexander. "Political wrangling in Washington is having an impact on business confidence." And declining business and consumer confidence could themselves take a further toll on the nation's economic growth.

Though it has given markets some breathing room, Boehner's proposal is only temporary relief, and the White House has not even accepted it yet. If lawmakers fail to bridge their partisan divides, the same debt ceiling fears will ripple through the economy again in six weeks, and markets will again increase the pressure to make a longer-term solution.

More News:

  • Obama Holds the Line on Shutdown, Debt Ceiling Negotiations
  • Shutdown Damaged Business Confidence in September, Report Shows
  • Some Republicans Don't Believe in the Debt Ceiling