The U.S. economy has weathered the Great Recession, four years of weak recovery, and stubbornly high unemployment. But now it faces a self-inflicted wound from a government shutdown.
Starting at midnight last night, 800,000 government workers deemed non-essential to skeleton operations were furloughed or asked to work without pay for an undetermined amount of time. The reason: Republican insistence in trying to overturn the health care policy known as Obamacare, which began operation today.
The longer the political stalemate and government closure, the longer and deeper the impact on the economy and business owners will be. And what's worse: the crisis sets the stage for an even more debilitating economic event, which would be the failure to negotiate the nation's borrowing limit.
"The shutdown will trickle through and affect everybody, starting with those government workers who will be furloughed and stop spending at local businesses," says Mitchell D. Weiss, an adjunct finance professor at the University of Hartford.
And that, combined with a deadlock over the debt ceiling limit, would be "quite serious because they [would] rock the fundamental perception of credit, which is trust," Weiss adds.
The Immediate Economic Implications
The federal government spends $100 billion annually on small business contracts. The budget impasse and government shutdown will first knock the wind from the sails of businesses that work directly with federal government as contractors, and then cause shock waves that ripple out to their vendors, and ultimately to other small businesses and consumers, economists and finance experts say.
The government closure will also create a backlog of loans from the Small Business Association, which will now not go out to small business owners who desperately need the financing from its critical 7(a) and 504 loan programs. Those finance billions of dollars worth of loans annually.
During the last government shut down in 1996, the government closed for 26 days, at an estimated cost of $1.4 billion, according to Congressional Research Service, equal to about $2 billion today, roughly $80 million a day.
Economists estimate that a shutdown of about one month will shave 1.25 percent to 1.5 percent from the GDP, equivalent to the amount lost during the automotive bankruptcy crisis during the Great Recession. In today's environment, with the economy limping along with growth between 1 percent and 3 percent per quarter, the shutdown could cause growth to flatline, or even dip into negative territory.
A Pervasive Small Business Sentiment: Uncertainty
"The shutdown goes back to the downturn we lived through: businesses will be very circumspect about this, and they will be very careful about hiring and expanding and investing in new equipment, and all the rest," Weiss"¨ says.
Thirty-eight percent of 1,000 business owners polled September 30 and October 1 by small business network MANTA said they favored a shutdown, while 62 percent said it would negatively affect the economy, and nearly half said it would have a negative impact on their own businesses. American voters were even more adamant, opposing the shutdown 72 percent to 22 percent. They also opposed blocking a debt limit increase by 64 percent to 27 percent, according to Quinnipiac poll released Tuesday.
Reactions from Owners: Dislike and Dismay
"I dont like what is going on by any means," says Larry Miller, founder and chief executive of BNL in Lovettsville, Virginia, which provides systems engineering and program management to the Departments of Defense and Treasury, and the Veterans Administration.
"If I ran my business the way Harry Reid runs the Senate and (John Boehner) is running the House, we would be broke," says Miller, who describes himself as a lifelong conservative Republican. He adds that damage from the shutdown to his fast-growth company, which has a compound annual growth rate of more than 1,000 percent, could last six months to many years.
Joni Green, who says she is an Independent and has supported both parties, is equally dismayed. "I would say to Congress, 'Please think of the American people and the consequences of your choices, and I would tell them to put logic and common sense back into the process, because it has left the building'."
Green is founder and chief executive of Five Stones Research in Brownsboro, Alabama, a 51-employee firm on track for about 9 million in revenue this year. Her company provides information management technology and services to the Department of Defense.
Up Next: the Debt Ceiling Debate
Even worse, the budget impasse sets the stage for a much bigger crisis, which is the potential to default on national debt if the ceiling on borrowing is not lifted. Failure to negotiate would be calamitous for the U.S. economy and potentially the global economy, experts say.
"Default would be catastrophic, and I don't see how the market would recover from this any time soon, because so much is based on the U.S. Treasury and Treasury yield," says Jonathan Citrin, founder and executive chair of investment advisory CitrinGroup and an adjunct professor of finance at Wayne State University.
A government default would inevitably mean higher interest rates, which would increase the cost of borrowing for all small business owners.
U.S. indexes eked out meager gains today, with the Dow rising 0.23 percent. "[Investors] may be saying this is nothing, but they have their fingers on the button and they are just one hiccup away from this market plummeting," Citrin adds.