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Uncertainty of future shutdown could dampen holiday spending

Though the federal government shutdown ended last week, the economic impact is likely to be felt in Maryland for months, dimming prospects for a robust holiday shopping season.

With Congress funding the government only through Jan. 15 — raising the specter of another shutdown — some federal workers in Maryland plan to limit their holiday spending. Stores are bracing for more frugal customers. And financial experts are urging federal workers to start saving immediately.

"To move the economy forward, we need a strong consumer. If a consumer can't rely on his or her job … they aren't going to spend," said Bradley Turner, an associate economist at Moody's Analytics. "It's going to be a pretty weak holiday season."

Joyce Dunlap and her husband, one of the essential federal employees who worked without pay while most government agencies closed, are already gearing up for another shutdown.

"We are going to have Christmas dinner, but we're giving out IOUs for Christmas gifts," said Dunlap, 60. Each IOU will disclose the gift to be received "if the government gets its act together by Jan. 15."

The Baltimore County resident added, "As far as the economy, we are not contributing to it for Christmas."

Economists predict that many consumers will follow the Dunlaps' lead, holding back on holiday spending while waiting to see whether lawmakers will work together or throw the country into a crisis once more. With holiday sales on average accounting for nearly 20 percent of retailers' annual sales, such thriftiness could have a big impact on merchants in Maryland, where more than 300,000 federal workers live.

"If you are a government employee and know that in the middle of January there is a good chance that you may be out of a job, you probably will save as much as you can," said Daraius Irani, executive director of the Regional Economic Studies Institute at Towson University. "I suspect the holiday sales will be a bit soft here in the region because of that looming threat."

The 16-day shutdown has already taken a toll, with Standard & Poor's estimating that it took $24 billion out of the U.S. economy.

Maryland will likely see slightly lower growth at the end of the year because of the shutdown, said Richard Clinch, a locally based research economist at Battelle Memorial Institute.

"Some of it will come back. People who didn't pay the mortgage will get their back pay and pay their mortgage," he said.

But Clinch and other economists note that many Marylanders don't work directly for the government and won't be able to make up lost income. That includes those employed by government contractors, vendors, hotels, dry cleaners and restaurants catering to agencies like National Institutes of Health in Bethesda and the Food and Drug Administration in Silver Spring.

As Irani noted, "People didn't go to lunch for 16 days."

The compromise struck by lawmakers last week is unlikely to boost the economy or inspire confidence among consumers, economists said.

"It's a short-term nonsolution to the bitter divide in Congress," Turner said.

Rudy D'Alessandro, 50, is a National Park Service employee who has lived through two shutdowns. Last week's deal means "Christmas gifts will be much smaller, a trip out of town for the weekend doesn't happen," he said.

The Rockville resident, who is also a chapter president with the National Treasury Employees Union, will receive his next paycheck Oct. 29. "There is no word when we will get back pay," said D'Alessandro, who has an unemployed wife and a son in college.

The uncertainty is also prompting Gerald Davis to scale back holiday plans.

Davis, a quality assurance evaluator at Fort Meade who is also married to a federal employee, said his family will be staying in Maryland this winter, rather than making their usual trip to visit relatives in Chicago.

"We already put it out there that we will not be having a whole lot of gifts," said Davis, 58, of Bowie. Friends and relatives who work for Uncle Sam have been sending out similar warnings of holiday austerity, he said.

That sentiment was picked up by a National Retail Federation poll this month.

Consumers said they expect to spend about $738 on holiday shopping, or 2 percent less than they spent last year. Nearly a third said political gridlock over budget issues would affect their spending.

The retail group — whose separate forecast calls for a 3.9 percent increase in holiday spending compared to the 4.1 percent prediction last year — expressed disappointment that lawmakers didn't reach a long-term budget deal.

"As we head into the holiday shopping season, retailers and consumers need stability and certainty from policymakers in Washington and assurance that the economy will not implode due to their actions or more important, lack thereof," CEO Matthew Shay said in a statement.

Auto sales in Maryland started to stall in late September due to the potential for a shutdown, after what had been a strong year, said Peter Kitzmiller, president of the Maryland Automobile Dealers Association. October "hasn't been very good at all," he said.

Kitzmiller is concerned that the prospect of another shutdown might keep government contractors and federal workers from spending money. "It doesn't bode well if this thing keeps hanging out there," he said.

Amanda Coleman, general manager at Nelson Coleman Jewelers in Towson, said she watched the shutdown drama unfold and is concerned that it might not be over.

"If people are not confident in our government and there is a lack of consumer confidence, it is going to hurt the retail season," she said.

Economic uncertainty last year caused customers to rein in spending, Coleman recalled. The jeweler added more inexpensive items to cater to those with smaller budgets and now has expanded those offerings, she said. Customers can buy sterling silver rings and pendants for less than $25.

Dunlap, who plans to hand out the holiday IOUs, is also frustrated with lawmakers.

"We don't know what [legislators] are going to do in January. A lot of people will be trying to recover from this," said Dunlap. "Unfortunately, this is a horrible time to do this. There are so many that haven't recovered from the recession."

The shutdown did reveal that many federal workers and contractors are living paycheck to paycheck. That's due to a combination of factors, including stagnant wages, the high cost of living in certain parts of Maryland and the fact that Americans generally are poor savers, experts said.

Economist Irani said federal workers need to put aside money in a "rainy day fund or shutdown fund."

Bethesda financial planner Arthur Stein said he typically recommends that nongovernment workers set aside six to 12 months' worth of living expenses for emergencies, while federal workers put away half that amount.

But things have changed. "We have gone from a situation where [federal workers] had the highest job security to a situation where that's no longer true," said Stein, whose client list is heavy with current and former federal workers

Given that, Stein said, he is going to start advising federal workers to save as much as his other clients.

"Which is too bad. That's money that will end up sitting in a money market fund or CDs and not getting much of a rate of return," he said. "It's a high price to pay."

eileen.ambrose@baltsun.com

Copyright © 2014, The Baltimore Sun
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