How long will the government shutdown last? Unfortunately this is something no one can predict, but it doesn’t look like it will be ending any time soon. The Republicans and Democrats do not look poised to settle their differences, so hundreds of thousands of government workers remain on furlough this morning. A split within the Republican Party itself isn’t helping matters any.
Government shutdown extends beyond furloughs
But unfortunately the longer the government shutdown goes on, the greater the impact it will have on the finances of American citizens. WalletHub CEO Odysseas Papadimitriou says there’s a domino effect that will send ripples throughout the U.S. economy.
“While the federal government shutdown has taken on a circus-like atmosphere, it’s important to remember that this disruption stands to impact more than just our ability to watch the panda cub at the National Zoo or visit Lady Liberty,” said Papadimitriou. “The shutdown’s economic domino effect also extends far beyond the 800,000 government workers who are now on furlough or are working without pay.”
The government shutdown affects the economy
According to Papadimitriou, the economic recovery that appears to have been underway prior to the government shutdown will now be stunted. Economists estimate that it will slash quarterly gross domestic product growth by between .15 and .2 percentage points every week. If the shutdown lasts three or four weeks, Moody’s Analytics Chief Economist Mark Zandi estimates that we could see a 1.4 percentage point reduction in growth. The result would be a slowdown in the number of jobs being added and greater uncertainty within the markets.
Federal loans will also be affected by the shutdown. The Department of Education believes it won’t impact federal student loans or Pell grants very much. However, loans made through the Small Business Administration and the Federal Housing Administration will not be accessible.
Effects on the credit industry and Wall Street
Government employees who have been forced into furlough will also have to work quickly to get credit and short-term loans because suddenly they’re without pay. In addition, Papadimitriou says interest rates on U.S. bonds will start going up, which in turn will force up interest rates on credit cards, mortgages, auto loans and other lines of credit.
He also notes that the longer the government remains shutdown, the more damage could be done to financial portfolios. Stocks haven’t been doing too bad in these early days of the shutdown, and they typically go back up after shutdowns are over. However, during the 1995 to 1996 shutdown, stocks fell by about 4 percent. The good news is that they rose 10 percent after it was all over. This may not sound too bad, but it will create a lot of anxiety in the markets—particularly if it lasts for some time.
In addition, the shutdown will affect tax refunds, particularly for those who filed for a six-month extension in April and will have to pay by Oct. 15. Taxes will still have to be filed, but those tax refunds won’t be coming anytime soon. This could put a pinch on households that are already seeing their finances suffer.
Fighting back against the government shutdown
Papadimitriou says even though it may feel as if consumers can do nothing in the face of this government shutdown, he recommends that they remain in contact at all times with their creditors.
“While it may seem like our fate is entirely in the hands of Congress, there are indeed steps that we as consumers can take to prepare for what may come during and after the government shutdown, much like one would batten down the hatches in advance of a hurricane,” Papadimitriou said. “But mitigating the impact of the shutdown on your finances necessitates planning and financial self-awareness – two areas in which many of us have struggled in recent years. You simply can’t insulate yourself from the vagaries of the current political and economic landscapes with your head buried in the sand.”
He also says consumers should start looking to lock in variable rates to fixed rates on any lines of credit they have and cut back on spending, even if they haven’t been put on furlough.
