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Will the Shutdown Devastate the US Economy?

Will the government shutdown affect your business?

Having more than 800,000 employees not drawing their paychecks can't be a good thing in a struggling US economy where job reports are watched as closely as the Dow Jones Industrial Average.

Some experts don't believe the government shutdown will have much of a negative impact. According to the research firm IHS Global Insight, "The spending habits of government employees probably would not change if the shutdown was short-lived, particularly if they believed that they would receive back (pay)."

The average American will likely be thinking of the government shutdown when making purchases, but spending will probably pick back up when the things go back to normal. The shutdown "hurts consumer confidence, and it doesn't help with cash flow, but in terms of financial impact it's going to be made up when the government reopens," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Yet experts are also quick to point out that if the shutdown lasts too long, it will start to have an effect on the private sector. When government employees are sitting at home, they are not taking taxicabs to work or eating lunch in restaurants.

They are not picking up a newspaper at the newsstand or grabbing a drink with colleagues after work. The longer national parks and other destinations remain closed, the more the tourism trade will feel the effects.

The overall economy might find itself hurt more by a troubled tourism industry than most people think, according to Mark Zandi of Moody's Analytics: "... if you look since the recovery began, this (travel and tourism) is the one sector that's added the most jobs to the economy."

Hurting the struggling housing market
Warren Buffett boldly stated: "... if we can fix the housing market, we can fix the economy." Since the housing bubble has shouldered a majority of the blame for the economic crisis, he might be right.

So for a financial sector that is just starting to get back on its feet, the shutdown couldn't have happened at a worse time for the housing market.

"Lenders processing loans that need tax transcripts, Social Security number verification, or FHA home loans face longer delays and reduced functionality," says David H. Stevens, the president and CEO of the Mortgage Bankers Association.

"The furloughs can disrupt time-sensitive mortgage transaction deals by interfering with borrower lock agreements and causing interest rate disparities from the time of closing to the time the loan is securitized."

Stock market response
To counter any negative effects the shutdown might have on the current bull market, Wall Street turned to statistics showing how past shutdowns were short-lived and their impact on the market were brief as well.

Those who are trying to calm investors' fears have not ignored the fact that three of the four major stock indexes in the US have shown gains since the shutdown began.

Despite the facts and figures being released by people trying to keep the markets stable, there has been a great deal of fluctuation in all the major indexes since the start of the government shutdown. However, some believe that dips in trading are due more to the looming debt ceiling debate and less about the shutdown.

In a memo sent to clients, Dan Greenhaus, chief global strategist for the brokerage BTIG warned that ill-will from the shutdown could spill over into the coming debate over raising the debt limit.

"We had said we were starting to get nervous. If this continues, nervousness will have to give way to fright."

More important than anything else is how the public views the economy in light of the current political battle. A Gallup Poll shows that 2 out of 3 Americans feel the economy is getting worse. That lack of confidence is likely to do more to stall a recovery than the current lack of cooperation in Washington.

More Stories By Drew Hendricks

Drew Hendricks is a writer, as well as a tech, social media and environmental enthusiast, living in San Francisco. He is a contributing writer at Forbes, Technorati and The Huffington Post.

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