Tags: us | economy | moodys | mark | zandi | Long | Government

Moody's Zandi: Long Government Shutdown May Push US Into Recession

Wednesday, 30 Mar 2011 01:39 PM

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A prolonged government shutdown could throw the country back into a recession, says Mark Zandi, chief economist of Moody's Analytics. If lawmakers don't agree on a spending plan by April 8, portions of the government could close.

While the economy could withstand a temporary closure, anything longer than around two weeks could damage economic activity and confidence in general, thus serving as "fodder for a new recession."

"Confidence is already very, very fragile," says Zandi, who has been an economic adviser to both Republican and Democratic lawmakers, according to the Huffington Post.

zandi200.jpg
Mark Zandi
"A very short shutdown would be manageable, but the damage that it would do to the confidence in the economy would quickly mount with each passing day," says Zandi.

Americans' confidence in their economy is slipping thanks to the Japanese earthquake and nuclear disaster on top of unrest in the Middle East, which is pushing already high oil prices even higher.

The Confidence Board index —a measure of how the country feels about its economic future — fell in March after hitting a three-year high February as expectations about jobs and income growth worsened, Reuters reports.

Confidence is big in the U.S., as it affects consumer spending, the motor of U.S. economic activity.

"Even though the actual direct effects of a two-week government shutdown may not seem like such a big deal, it could trigger a mass panic or sell-off, or other types of market dynamics that could be really hard to predict or control," Andrew Lo, professor of finance at the MIT Sloan School of Management, tells the Huffington Post, adding that Americans might "start wondering whether or not government works at all."

While the economy is officially on the path to recovery, it must still address certain weaknesses that got it into trouble in the first place, such as the housing market, analysts say.

"The economy is still recovering from a substantial crisis. You've got some indicators pointing to faster growth but there are still areas of weakness, especially housing," says Vassili Serebriakov, senior currency strategist at Wells Fargo in New York, according to Reuters.

"As far as consumer confidence, it all hangs on how long the Mideast unrest will last and how high oil prices will go. The good news is that despite all the negative news headlines, equity markets have been tremendously resilient, so that will help confidence going forward."

Some say, however, that a shutdown won't be so bad.

"In many respects it's the bureaucracy that shuts down — the statistical agencies that collect and report on the state of the economy and commerce, various kinds of permitting and approvals," Brian Bethune, chief financial economist for North America at IHS Global Insight, tells the Huffington Post.

"These shutdowns have happened before, and they really haven't had that big of an impact on the economy."

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