Advertisement
Business

Government shutdown’s ripples hit the private sector

Government shutdown’s ripples hit the private sector
Christine Lagarde, head of the International Monetary Fund, says it is “mission critical” that the standoff in the U.S. be resolved soon. She is worried that not raising the U.S. debt limit could cause serious harm to the global economy.
(Andrew Harrer, Bloomberg)

WASHINGTON — Less than a week into the federal government shutdown, the economic effects are starting to be felt beyond the nation’s capital.

Layoffs are beginning in the private sector. More investors are unloading Treasury notes. And beneath the surface of the apparent calm in financial markets, banks and corporate chief financial officers are quietly taking steps to prepare for what many see as a potentially disastrous scenario if lawmakers fail to raise the debt limit by the Oct. 17 deadline.

Advertisement

Defense giant Lockheed Martin Corp. announced it would furlough about 3,000 employees starting Monday, attributing the move directly to the political standoff that has shut down much of the government, including the facilities where Lockheed employees work.

That could be just the beginning: The company said that if the shutdown persists, the number of workers affected could increase weekly.

Advertisement

Also Friday, Sikorsky Aircraft Corp. in Connecticut notified 2,000 employees that they would face temporary layoffs if the shutdown doesn’t end by Monday. Sikorsky said it could not keep producing helicopters for the Defense Department because government officials who perform a crucial role in the inspection process have been furloughed.

Many small businesses such as food services that cater to government employees have cut staffing or hours of work. Some say next week will be pivotal to their cash flow or their ability to make payroll.

Zeke Grader, executive director of the Pacific Coast Federation of Fishermen’s Assns., has been locked out of his San Francisco office because it’s in a U.S. government-owned building that closed with the Washington shutdown. He won’t be able to pay his workers if he doesn’t soon get access to the building.

“If this keeps going on, it is going to create problems,” Grader said.

Advertisement

Economists say that a partial government shutdown of a week or two will do little lasting damage to the overall U.S. economy — although it may be hard to know for some time.

Government analysts and statisticians are among the 800,000 on furlough, which means a variety of reports that help policymakers and others track business activity and the economy aren’t being published.

That includes the monthly jobs report, which was due to be released Friday but was postponed indefinitely. It was the first time the Labor Department has missed a scheduled release of the Employment Situation since the last government shutdown, 17 years ago.

Yet all these things will seem like small potatoes if the stalemate over the budget lasts and Congress does not raise the federal debt limit this month. Without greater borrowing authority, the U.S. will run out of money to pay its bills. The government will default if it misses meeting its obligations, whether to Social Security recipients at home or interest payment on debt owed to foreign bond holders.

Advertisement

No one knows for sure what might happen next. But there’s broad agreement among experts that a first-ever U.S. government default — at risk if the $16.7-trillion debt limit isn’t raised — could trigger a major financial crisis. Treasury Department officials warned this week that it could be worse than the 2008 financial crisis and the Great Recession, labeling the prospect potentially “catastrophic.”

Christine Lagarde, head of the International Monetary Fund, is worried that not raising the U.S. debt limit could cause serious harm to the global economy. She said Friday that it was “mission critical” that the standoff be resolved soon.

At this point, few experts in government, business or academia think that Washington would dare to let the country default. House Speaker John Boehner (R-Ohio) has suggested as much in private discussions with members of his party.

Yet on Friday he continued to press for changes to the country’s healthcare law as a condition for funding the government, even though President Obama and Senate Democrats have flatly refused.

Thus far, Wall Street has taken the shutdown largely in stride. Stocks ended higher Friday, although major indexes were down slightly for the week.

“In a way, the market is saying, ‘We’ve seen this before,’ and the risk of a bad outcome for the market isn’t big enough for investors to make a rush for the exits,” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi in New York. “The Treasury is concerned about a catastrophe, but nobody expects a catastrophe.”

Still, company executives and investors are getting nervous.

Rupkey says he has begun receiving calls from financial officers at firms asking these questions: Do we have enough liquidity? Should we increase cash reserves? How high could interest rates go in the event of a government default?

He mostly has tried to reassure them.

“I’m not looking for that Armageddon, Lehman moment that’s going to bring down the markets,” Rupkey said, referring to the freeze in credit markets and other shocks after Lehman Bros. went bankrupt in 2008.

Still, Rupkey said he had not gotten such calls since the Lehman incident, and some fault lines in financial markets are developing. Yields on Treasury bills that mature at the end of October are higher than those maturing just before or after Oct. 17.

At least one U.S. bank has been stocking extra cash in its cash machines in case there is a run, the Financial Times has reported.

Also, the cost of insurance on Treasury bonds, in the form of credit default swaps, jumped this week, said Mark Zandi, chief economist at Moody’s Analytics. “I suspect as you get into next week that will become much more evident,” he said.

U.S. Treasury bills are used as collateral in financial markets, and a default on some of those bills would cause markets to freeze up, said Justin Wolfers, a senior fellow at the Brookings Institution think tank.

“Much as we saw in the financial crisis, no one was willing to trade with anyone else because they didn’t know if you were holding a bunch of bad securities on your books,” he said. “In this case, instead of mortgage-backed securities, they’re Treasuries.”

Zandi also predicts that the situation will quickly get out of hand if the debt limit is breached.

“It would be just a mess, and it would be very difficult to staunch the unraveling economy at that point,” he said. “I think we would be very quickly in a recession and in a very dark one.”

don.lee@latimes.com

jim.puzzanghera@latimes.com

Times staff writer Shan Li in Los Angeles contributed to this report.


Newsletter
Get our weekly California Inc. newsletter
Advertisement