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Industry Weighs Fallout From Government Shutdown

Key agencies cut off information and reduce staff.

President Obama spoke out about the shutdown Tuesday.

WASHINGTON — Commerce and trade found themselves in the crosshairs of the U.S. government shutdown on Tuesday. The move in Washington threatened to impede ongoing trade negotiations, delay trade enforcement cases and impact regulatory issues important to the fashion industry, while slowing economic growth in the fourth quarter if the stalemate drags on.

Congress failed to reach a deal on a new federal budget to fund the government as the fiscal year ended at midnight on Monday. House Republicans refused to pass a straight bill that would continue funding, insisting instead on attaching language to defund or delay implementation of President Obama’s signature health care initiative that was to go into effect on Tuesday. The Democratic-led Senate rejected the House measures and the resulting impasse led to the shutdown.

It is uncertain how long the impasse will drag on, but a looming fight over the Oct. 17 deadline to raise the government’s debt ceiling could eclipse and postpone any deal on government funding, which has economic experts concerned, as a prolonged shutdown is expected to take a toll on the overall economy. Key government reports that act as a barometer on how the economy is performing, such as the monthly employment report, international trade data, retail sales and the consumer price index, could all be delayed if the shutdown continues.

The shutdown is affecting an estimated 800,000 federal workers who have been deemed “nonessential” and are being furloughed as a result of the absence of funding. Some of the activities of the two main trade agencies that govern billions of dollars in trade affecting the fashion industry have been curtailed. Key government Web sites that provide valuable information to companies looking to make products in the U.S. or export or import apparel, textiles and footwear were also shut down.

U.S. ports were open and nearly fully staffed by U.S. Customs and Border Protection employees — a bright spot for fashion importers, who shipped $102 billion worth of apparel and textiles to the U.S. in the past year.

The U.S. Trade Representative’s Office said in its contingency plan that it would cut its staff to 61 full-time employees from a total of 232 in the absence of funding. USTR is in talks for the Trans-Pacific Partnership with 11 countries and a separate Trans-Atlantic deal with the European Union. USTR Michael Froman is in Europe this week in advance of a TPP ministerial meeting in Bali next week and the second round of Trans-Atlantic negotiations with the EU in Brussels.

In a note to stakeholders obtained by WWD, USTR said: “Due to a lapse in federal appropriations, as of Oct. 1, USTR will be unable to carry out normal operations.”

The USTR office said it hopes the “lapse will be brief,” and noted that officials still plan to participate in upcoming meetings of the TPP ministers and APEC in Bali starting Thursday and running through Oct. 8, as well as the Transatlantic Trade and Investment Partnership, or T-TIP, negotiations with the EU in Brussels Oct. 7 and 8.

“In the event of a prolonged lapse in funding, plans may change and we will inform you accordingly,” USTR said.

Julia Hughes, president of the U.S. Association of Importers of Textiles and Apparel, said companies are not in panic mode, though the shutdown has already caused difficulties in some of the daily interactions with trade agencies. She said companies are hopeful the shutdown will be brief.

“What is perhaps more striking this time than 17 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,” Hughes 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,” said. “Any time you shut a government agency, it is problematic.”

The executives noted that port operations have not been impacted by the shutdown and no cargo delays have been reported. The Department of Homeland Security said that in its contingency plan 52,673 of its 59,561 Customs employees will continue to work during the shutdown.

“The flow of goods off of ships will continue, but the flow of information from the government has ceased,” Burke said.

Jonathan Gold, vice president of supply chain and Customs policy at the National Retail Federation, said, “The concern is not just CBP, but other government agencies [such as the Consumer Product Safety Commission] that have a stake in what comes in the ports. Even though cargo is cleared by CBP, another agency might put it on hold because they don’t have the resources to make a determination.”

Gold said, however, that he had not heard of any port delays from the NRF’s member companies.

The stock market reacted Tuesday with a shrug. The S&P 500 Retail Industry group increased 1.4 percent, or 11.73 points, to 858.97, outpacing the Dow Jones Industrial Average, which gained 0.4 percent, or 62.03 points, to 15,191.70.

While the ramifications of the government shutdown were just starting to be felt, economists and academics were eyeing the larger fight over the debt ceiling and sending up warning signals about the impact on the economy.

IHS Global Insight chief U.S. economist Doug Handler and director of U.S. financial economics Paul Edelstein said the shutdown could result in a $1.6 billion weekly loss to gross domestic product and negatively shape economic growth in the fourth quarter. But they stressed that the upcoming political fight over the debt ceiling and potential restrictions on borrowing and spending is the greater potential danger.

Handler and Edelstein’s analysis said, “Even mere discussions about not raising the debt ceiling have negative economic implications. They raise the perceived risk of doing business with the federal government among holders of Treasury securities and companies with government contracts. Such risk may eventually be seen in higher interest rates and lower equity values.”

They said the overall impact of the government shutdown or the failure to increase the debt ceiling depends on the length of either the shutdown or the period when U.S. borrowing is constrained; the degree to which payments are restored after the initial disruption; the perception of consumers, businesses and holders of U.S. debt whether this is part of Washington’s business as usual or a significant deterioration in the business environment where long-term planning becomes more difficult, and the long-term damage caused by an undermining of confidence in the government’s ability to conduct its fiscal affairs to promote stability and benefits of long-term planning.

Lindsey M. Piegza, chief economist at Sterne Agee, pointed out that while the last government shutdown [in 1996] lasted three weeks, with a “minimal impact to growth,” this time around the “politicians should keep in mind that consumers are increasingly sensitive to a shutdown and political theater on Capitol Hill because the budget debate last year resulted in a very onerous payroll tax increase at the start of this year.”

Phillip Swagel, professor of international economic policy at the University of Maryland and a former Treasury Department official, said he expects the shutdown to have a “modest impact” on the economy if it is just in the short term.

“If this is resolved in a week, the costs will be modest,” said Swagel, adding that the “dividing line” between a modest impact to the economy and a more dramatic impact is one week.

“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,” Swagel said. “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.”