INSIGHT: US federal shutdown could build into cumulative crisis

03 October 2013 16:55 Source:ICIS News

By Joe Kamalick

US financial future under a cloudWASHINGTON (ICIS)--The partial US government shutdown is having little immediate impact on the nation, but with each passing day and week the cumulative effect could turn a trickle of troubles into a torrent that could undermine industry and the broader economy.

More worrisome still, the shutdown that began on Tuesday this week is but a springtime shower compared with the financial hurricane building around the US federal debt limit, a much larger crisis that will crest in two weeks.

While the partial shutdown has idled some 800,000 federal employees, the other 1.3m government workers are still on the job - although neither the furloughed workers nor those still at their desks are being paid.

While the shutdown drama plays out in Congress, a bigger battle looms.

By law, Congress must authorise any increase in the amount of debt that the federal government may incur. 

The current debt limit of $16.7tn (€12.4tn) was reached sometime in May this year. 

Since then the Treasury Department has avoided further borrowing by tapping into a number of federal cash reserves to cover Uncle Sam’s daily expenditures, which range from $10bn to as high as $60bn. Per day.

Treasury Secretary Jacob Lew said on Tuesday that the department’s ability to dip into other cash funds here and there to cover those daily obligations will be exhausted by 17 October.

At that point - and unless Congress raises the borrowing cap - the United States government would technically be in default, unable to pay most of its bills, including Social Security, Medicare, veterans’ benefits, military costs and, worst of all, unable to make principal and interest payments on its existing $16.7tn worth of credit card debt.

In round numbers, the US government on average spends about $10bn a day. Of that amount, Uncle Sam has only $6bn in daily revenues and must borrow nearly $4bn each day to make up the overall $10bn payroll.

If 17 October arrives without Congress having raised the debt limit, Lew said the Treasury would have only $30bn on hand, little more than pocket change in terms of federal spending and not enough to cover more than a day or two of obligations.

No one really knows what would happen if the US government actually slipped into default, except that it would be catastrophic.

Even as Republican and Democrat leaders in Congress meet with President Barack Obama on the shutdown, there are mounting concerns that the shutdown dispute could run on for a week or more, consuming time and political oxygen that those policymakers need to resolve the much larger issue of the debt.

The shutdown has barely made any ripples so far in the US economy. While the stock market dipped on Monday in anticipation of the shutdown, Wall Street largely recovered thereafter.

Putting aside the debt limit issue - if the 900-pound gorilla can be ignored for the moment - the impact of the shutdown soon will begin to percolate through the chemicals industry and the broader economy.

Bill Allmond, vice president for government and public relations at the Society of Chemical Manufacturers and Affiliates (SOCMA), contends that one immediate impact of the shutdown is “more uncertainty about when the government is going to act on legislative priorities important to the chemicals industry”.

In addition to long-standing efforts in Congress to modernise the Toxic Substances Control Act (TSCA), other key issues such as tax reform, regulatory consolidation, plant site security, freight rail and general infrastructure concerns “are now further on the backburner than they were before”, Allmond said.

He also pointed out that the second round of formal negotiations between the US and EU over the pending Transatlantic Trade and Investment Partnership (TTIP) that were to resume next week in Brussels are likely to be postponed.

That could halt progress, Allmond noted, toward eliminating more than $1bn in EU tariffs that US chemical makers and exporters pay each year.

With the Environmental Protection Agency (EPA) effectively out of action - some 90% of its workers have been furloughed - Allmond worries that EPA approvals for new chemical products will be unavailable, adding indefinite delays to what is already a tortuous process.

“If the shutdown lasts a week or two,” said Allmond, “the impact shouldn’t be that great on the chemical industry.”

“But if the shutdown is extended, like the 1995-1996 shutdown [that lasted nearly three weeks], chemical makers will most certainly feel some impact,” he added.

Beyond the chemicals sector, the shutdown also could create problems for the overall economy, according to economists at the Manufacturers Alliance for Productivity and Innovation (MAPI).

MAPI, which represents hundreds of US manufacturers including chemicals makers, cautioned that “The longer a federal shutdown lasts, the greater the damage done to the economy”.

MAPI chief economist Daniel Meckstroth said that “a shutdown lasting a few days would not have much of a macroeconomic impact on the economy”.

But beyond a few days, “a longer shutdown results in higher costs of lost pay and postponed programmes, and the reduction in spending spreads throughout the economy”, he said.

Meckstroth said the shutdown would shave 0.2 percentage points off US gross domestic product (GDP) in the fourth quarter this year.

Each successive week of budget shutdown would have cumulative effect, Meckstroth said.

“A two-week shutdown would cut economic growth by more than 0.4 percentage points, since the supply chain impact on contractors would start spreading throughout the economy,” he added.

As an example of the spreading financial contagion, the US housing sector - a major downstream consumer industry for chemicals and resins - may feel the shutdown impact sooner than others.

Robert Dietz, vice president and an economist at the National Association of Home Builders (NAHB), cautioned that the shutdown will slow down financing for federally funded mortgage loans, and no new federal underwriting of multi-family apartment projects will be made.

In addition, rural development programmes will cease in the absence of federal appropriations. Housing contractors will be unable to hire new workers because the federal background-check security system is idle.

Federal permitting for property development and inspections by the Occupational Safety and Health Administration (OSHA) will not be available, further delaying some construction projects.

($1 = €0.74)

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By Joe Kamalick