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Apparel Industry Braces for Impact of U.S. Government Shutdown

After the failure to resolve a congressional stalemate regarding a budgetary dispute, the federal government was forced to shutdown, raising questions about the magnitude of the impact on the global economy.

Congress proved unable to forge a bipartisan compromise on a new budget prior to the midnight deadline Monday. As a result, more than 800,000 federal workers classified as “nonessential” (out of an grand total of approximately two million workers) have been furloughed without pay indefinitely. The reverberations have already traveled wide: key government offices have been shuttered, national parks closed due to an absence of staff and several government websites that provide valuable information are no longer being updated.

While the totality of the economic fallout is difficult to measure, the IHS, a global information company based in Massachusetts, estimates that the shutdown will cost the U.S. about $300 million a day. While that figure is a negligible fraction of the U.S.’s $15.7 trillion economy, it could still have a disproportionate impact on future growth. The IHS predicts that the previous fourth quarter growth projection of 2.2% will have to be reduced by 0.2%, working on the assumption that the shutdown lasts for only one week. However, a more protracted discontinuation of federal services, say three weeks, could reduce the growth forecast by as much as 1.4%.

Guy LeBas, chief fixed income strategist at Janney Montogomery Scott LLC in Philadelphia, said, “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.”

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The prospect of a longer shutdown, something comparable to the disastrous one in 1995-6, has investors apprehensive. Eric Green, head of foreign exchange, rates and commodities at TD Securities USA LLC, said, “The longer the shutdown, the more damage will accrue to business and consumer confidence. A longer shutdown stretching into mid-October, when the Treasury estimated that the debt ceiling will need to be raised, would likely magnify the hit to economic activity by raising the risk of a bad outcome on the debt ceiling.”

Phillip Swagel, professor of international economic policy at the University of Maryland and a former Treasury Department official, said, “If this is resolved in a week, the costs will be modest. “I feel like it is going to be at least a few days before the shutdown ends because the political pain has to be felt by [Congressional] members who didn’t understand it. In the short term, it will be very modest impact…and it will be a political issue more than an economic issue. But if the shutdown goes beyond a week, the economic consequences will start to become more important.”

In fact, it was precisely these fears that plunged stocks lower, squandering the most impressive quarterly gain since early 2012. Also, the ten-year Treasury notes traded at a seven-year low. The Standard & Poor’s 500 dropped 0.6% to 1,681.55; the ten principal industries represented on the S&P, including consumer goods, oil and gas, all experienced significant hits with respect to their share prices.

The global garment industry has braced itself for some potentially tough days ahead. Trade agencies that superintend billions of dollars in international commerce are now hamstrung by a lack of resources. And fragile negotiations regarding several free trade agreements that profoundly affect the garment industry will now be stalled.

According to Michael Froman, the U.S Trade Representative, his office has temporarily furloughed sixty-one out of its 232 employees. In a note to stakeholders published by WWD, the U.S. Trade Office said, “Due to a lapse in federal appropriations, as of Oct. 1, USTR will be unable to carry out normal operations.”

For many, the new limitations on the U.S. Trade Office are especially worrisome since there are several major free-trade agreements at critical junctures of their negotiations, including the TPP, the T-TIP and APEC, as well as distinct Trans-Atlantic deal in the works with Europe. While the U.S. Trade Office expressed the hope that the “lapse will be brief,” it also quietly communicated a less optimistic prognostication, preparing itself for the worst. “In the event of a prolonged lapse in funding, plans may change and we will inform you accordingly,” the office said.

Kevin Burke, president of the American Apparel & Footwear Association, said, “This only slows down the whole process of finishing TPP and continuing the work to build the case for T-TIP with the Europeans, both of which are very important trade agreements. Any time you shut a government agency, it is problematic.”

Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel, said, “What is perhaps more striking this time than seventeen years ago is how reliant we are on web sites and when the government web sites are down, it is a huge loss of information that companies rely on to support their businesses.”

The silver (or at least pewter) lining in an otherwise blackened cloud is that U.S. ports remained open and suffered relatively minor staffing reductions. Thus far, no cargo delays have been reported and the Department of Homeland Security stated that a relatively small portion of its employees would be furloughed, 52,673 out of 59,561. Burke seemed less than uplifted by the news. “The flow of goods off of ships will continue, but the flow of information from the government has ceased,” he said.

The shutdown is also likely to pinch those countries that engage in heavy trade with the U.S. According to Ahsan Mansur, executive director of the Policy Research Institute, said, “Their purchasing capacity will also be squeezed, and this will be felt by the supplying countries like Bangladesh.”

According to Rick Helfenbein, President of Luen Thai USA, the real damage gets done if Congress remains locked in a standoff, extending the shutdown further into the future:

“Short term, there is no immediate effect from an Industry prospective. Goods are moving and buyers are buying. Essentially, the damage will happen when, and if, this drags on too long, and especially if we hit the other wall on the debt ceiling. Right now, most people are just shaking their heads and wondering how we could have possibly elected such a dysfunctional Congress. The good news is that they get to vote now, but we get to vote later. Hopefully, they will start to remember who put them there in the first place.”