Shutdown could cut economic growth; Forecast of $300M a day in lost output.

• Author: Smialek, Jeanna
• Position: Business

Byline: Jeanna Smialek

A partial shutdown of the federal government would cost the U.S. at least $300 million a day in lost economic output at the start, according to IHS Inc., an economic forecasting firm based in Lexington.

While that is a small fraction of the country's $15.7 trillion economy, the daily impact of a shutdown is likely to accelerate if it continues because it depresses confidence and spending by businesses and consumers.

IHS estimates that its forecast for 2.2 percent annualized growth in the fourth quarter will be reduced 0.2 percentage point in a weeklong shutdown. A 21-day closing, like the one in 1995-96, could cut growth by 0.9 to 1.4 percentage point, according to Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.

"Government spending touches every aspect of the economy, and disruption of spending, more than the direct loss of income, threatens to damage investor and business confidence in ways that can seriously harm economic growth,'' LeBas said Monday in an interview.

The Fed on Sept. 18 unexpectedly refrained from reducing its $85 billion pace of bond purchases intended to boost growth, saying it needs more time to assess the economy's progress. Federal Reserve Bank of New York President William C. Dudley said last week the budget showdown in Washington is among the risks to the outlook.

The U.S. government Tuesday faced its first partial shutdown in 17 years as Republicans and Democrats remained at odds over whether to tie any changes to the 2010 Affordable Care Act to a short-term extension of government funding.

Failing to fund government operations "would throw a wrench into the gears of our economy,'' President Barack Obama said Monday at the White House. "The idea of putting the American people's hard-earned progress at risk is the height of irresponsibility, and it doesn't have to happen.''

Concern that a shutdown would stunt economic growth has sent stocks lower in recent days, but investors stayed calm on the first day of a partial shutdown of the government Tuesday, which sent the stock market modestly higher.

A shutdown would initially slow the expansion because output lost when workers are furloughed subtracts from gross domestic product. Economists estimate that 800,000 to 1 million of...