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US deadlock is broken, but the £24bn bill is hard reading


After every episode of self-indulgence there comes the sobering moment when the bill arrives. So what’s the damage for the American economy resulting from the government shutdown and the debt ceiling fandango? First of all, the wages of some hundreds of thousands of federal workers – all those park rangers, museum staff and office workers have not been paid for half a month. Unpaid wages, obviously, can’t be spent in the shops.

Financial markets have been remarkably calm given the dangers of a default, but American consumers do not appear to have been so sanguine. According to survey commissioned by Goldman Sachs and the International Council of Shopping Centres, around 40 per cent of those polled last week curbed their spending as a result of the shutdown.

Standard & Poor estimates the shutdown has sucked at least $24bn out of the economy so far. The credit agency has, accordingly, lowered its estimate for annualised American GDP growth in the fourth quarter of 2013 from three per cent to just over two per cent.

This week’s deal has only parked the deadlock over the debt ceiling and the budget, not resolved it. It would not be surprising if federal workers reined in their spending in anticipation of another “furlough” in January when funding is due to run out once again.

Another impact – although it is hard to quantify – is the harm done by the knock to international faith in America’s sovereign credit. The US was downgraded by a Chinese credit rating agency today. And last week the United States was put on negative watch by Fitch. The importance these agencies is often exaggerated. Yet it’s also possible that these rolling political rows will deter domestic firms and owners of foreign capital from investing and thus reduce the capacity of the world’s second largest economy to carrying on growing in future.