How a shutdown could affect the economy

By passing a bill that funds the government except for Obamacare, House Republicans have launched a battle with Democrats that could result in a federal government shutdown.

NEW YORK (CNNMoney) It would be inconvenient and frustrating. But how much would a federal government shutdown affect the economy?

It depends on how long it lasts.

"The effects build over time: Two weeks is worse than one week, and three works is still worse than two weeks, and four is still worse than that," Congressional Budget Office Director Douglas Elmendorf said earlier this week.

Mark Zandi, chief economist and co-founder of Moody's Analytics, got more specific.

Zandi estimates that a shutdown that lasts just a few days might cost the economy two-tenths of a percentage point of annualized growth during the fourth quarter. That's the economic equivalent of a smidge.

But if a shutdown runs for three or four weeks? "[That] would do significant economic damage" -- reducing GDP by 1.4 percentage points for the quarter, Zandi said in congressional testimony.

The last time there was a shutdown that long was at the end of 1995, when the government was shut down twice for nearly four weeks combined.

The CBO estimated those shutdowns shaved only about half a percentage point off growth in the fourth quarter of that year.

CNN: House GOP votes to defund Obamacare

Zandi said he is assuming a greater hit this time for two reasons. The first is timing: The 1995 shutdowns started in the second half of the quarter. This time, if Congress fails to pass a funding bill, the shutdown will begin on Oct. 1, the start of a new quarter.

In addition, Zandi noted, "the economy is much more fragile today than in 1995-96 when the economy was on the verge of the tech boom."

Mohamed El-E! rian, the CEO of bond fund firm PIMCO, thinks a shutdown could have several negative effects.

"First, it increases uncertainty which makes companies less willing to invest in new plants, equipment and hiring. Second, it forces the Fed to continue with experimental policies, the impact of which are uncertain," El-Erian told CNN.

Much might depend, too, on just how much of the federal government remains running during a shutdown. The White House will have some discretion in determining what's essential and what's not.

Typically any federal program or agency charged with protecting life and property -- such as air traffic control and food inspections -- is deemed critical, so operations there are likely to continue uninterrupted. Also likely to continue would be benefit payments such as Social Security checks.

But much of the federal government would be shuttered, and the money those agencies would normally spend would be delayed. Hundreds of thousands of federal workers would be furloughed without pay.

Another factor that could affect the economy in a prolonged shutdown is consumer, investor and business psychology, Zandi said.

And there's no telling what their psychology would be if a shutdown runs concurrent with a major standoff over the debt ceiling, raising the risk of a U.S. default.

Jobs, Not Inflation, Will Drive U.K. Rates

NEW YORK (TheStreet) -- Against the dollar, the pound is trading at its highest levels in eight months. Recent rallies have been driven by minutes from the September meeting at the Bank of England, where policymakers voted 9-0 decision to keep stimulus programs on hold.

This is a significant difference from what was seen during the August meeting, when a dissenting minority saw a "compelling" need for policy changes that were more accommodative.

This is also an implicit suggestion that the BOE is confident that improving macroeconomic data indicate a sustainable trend.

The reduced potential for additional monetary stimulus has pushed the pound to gains of nearly 7% since the end first quarter, which is one of the best performances we have seen this year in developed-market currencies. [Read: Yen Weakness Far From Over] But, at the same time, it should be noted that the currency is still down nearly 30% from its 2007 highs against the dollar. At this stage, it is clear that in order for pound rallies to sustain themselves, we will need to see higher yields and a commitment to raising interest rates. Without this, the pound is in a precarious position and vulnerable to large moves to the downside given the strength seen in the last few months. Supportive Data To be sure, economic data largely support the Bank of England's more hawkish stance. The economy in England, the third largest in Europe, is expected to expand 1.3% in 2013 and by 2% next year. This is slightly less than the GDP expectations for the U.S., where expectations rest at 1.6% for this year, and 2.7% for 2014. But England's August Purchasing Managers' Index (PMI) report showed that the service sector grew at its highest rate since 2006. [Read: There's Still More Upside in Silver Wheaton] A broader measure, the Citigroup Surprise Index (which tracks positive and negative results in all economic releases, relative to market expectations) has risen to 72 this month after hitting lows of -33 in May. But if we are going to see the higher interest rates needed to sustain long-term rallies in the pound, we will need to see the U.K.'s unemployment rate fall below the central bank's target of 7%.

Rate Expectations

Over the last decade, BOE decisions to raise interest rates have generally been based on surges in consumer price inflation, which in some cases have reached levels many would consider excessive for a developed economy.

Current policy goals at the BOE set the inflation target at 2% using a two- to three-year time horizon. But most recent comments from Governor Mark Carney suggest that the BOE has shifted focus and is much more concerned about the state of the labor market. In the three months through July, unemployment in the U.K. dropped to 7.7%, which is still well above the central bank's target. In order to reach the 7% goal need to see any changes in interest rate, the U.K. would need to create more than 750,000 new jobs.

All of this means that we still have some way to go before the BOE is likely to make a true commitment to rising rates. The pound at its elevated levels will be without a true bullish driver until we see the added incentive of higher yields for long-term positions. [Read: Luxury Watches -- Haute Horlogerie Is Happening] And when this stronger pound is taken into consideration along with the increased chances of reduced stimulus from the Federal Reserve, the pound is likely to experience some downside corrections into the final months of the year. At the time of publication, Cox had no positions in securities mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is based in China, and has lectured at several universities there on international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.