We Just Got The First Good Look At How The Shutdown Hit The Economy, And It Was Ugly

Markit just released the preliminary results of its October Purchasing Manager Index survey, which showed a significant slowdown in the pace of expansion in American manufacturing this month.

The most notable result of the survey was that manufacturing output actually contracted this month for the first time since 2009 after a strong expansion in September.

And the culprit was all domestic demand, according to survey respondents.

"A number of manufacturers linked lower levels of output to a weaker trend for new orders," said Markit in the release. "Incoming new work increased modestly in October, but at the slowest rate in six months. The easing in the rate of total new order growth generally reflected weaker domestic demand, according to panellists."

Backing claims that lackluster domestic demand was driving the slowdown was the fact that new export orders actually rose in October after falling in September.

Most economists are quick to dismiss the effects of the shutdown on the economy, but Markit's flash PMI survey results may suggest otherwise.

"The flash PMI provides the first insight into how business fared against the backdrop of the government shutdown in October, and suggests that the disruptions and uncertainty caused by the crisis hit companies hard," said Markit chief economist Chris Williamson. "The survey showed the first fall in manufacturing output since the height of the global financial crisis back in September 2009. We can expect GDP growth to have suffered a set-back in the fourth quarter, but it is too early to estimate the extent of the slowdown."

BofA Merrill Lynch economists slashed their Q3 and Q4 GDP growth forecasts during the government shutdown. When it was finally lifted - at least until January 15, when warring parties in Washington will spar over the budget again - BAML downgraded its Q1 2014 GDP growth forecast as well.

In a note to clients, BAML economist Ethan Harris wrote:

As we have noted before, the shutdown has made the economic and Fed outlook much more uncertain. Prior to the shutdown, the economy seemed to be still stuck at 2% growth, but with hope of stronger growth ahead. The shutdown caused both an austerity shock - cuts in government spending - and an uncertainty shock. The shutdown has hurt sentiment a lot, pushing many survey measures lower.

Looking ahead, the issue now is does sentiment quickly go back to pre-crisis levels or does it linger lower? The latter is likely if people worry about a sequence of shutdowns. Hence we need to wait for post-crisis survey data to get a clear sense of the lasting damage. Given release lags, it will take even longer to judge the impact on hard data.

Today's flash PMI release is the first post-shutdown survey.