US growth in danger as shutdown heads into second week
With no end in sight, the near week-old partial U.S. government shutdown is putting growth in the world's largest economy under further threat with each passing day, economists say.
"Both we and the consensus have had a baseline forecast that the government shutdown will be too short to impact fourth quarter GDP growth," Bank of America Merrill Lynch economists Ethan Harris and Michael Hanson wrote in a note on Friday.
"However, with the shutdown approaching its one-week anniversary and with both sides digging in their heels, that assumption is looking increasingly untenable," they said.
The bank cut its U.S. gross domestic product growth forecast for the October-December quarter to 2 percent, from 2.5 percent previously, citing lower government spending, business investment and consumption as confidence is undermined by the ongoing budget stalemate. The estimate is based on an assumption that the shutdown will last two weeks and there is no violation of the debt ceiling.
(Read more: Moody's CEO: US default 'extremely unlikely')
"Many sectors that rely on the Federal government for approvals or information are [being] impacted. The tourism and travel industry is hurt by the shutdown of national parks. And companies in the defense industry are already starting layoffs," Harris and Hanson said.
"Indeed, if this goes on long enough, we plan to cut growth our growth forecast for next year as well," they added.
Societe Generale estimates a two-week closure would wipe between 0.25 to 0.50 percentage points off annualized growth in the fourth quarter.
Aside from the Pentagon decision to bring most of its 400,000 furloughed civilian employees back to work and the House of Representatives passing legislation that would retroactively pay furloughed workers once the shutdown has ended, there was little evidence of progress in ending the federal shutdown over the weekend.
According to Goldman Sachs, these two steps could in fact prolong the duration of the shutdown. "With fewer employees affected, Congress may face less pressure to address the remaining areas," Goldman Sachs economists wrote in a note on Sunday.
Bank of America Merrill Lynch's Harris and Hanson also expect the shutdown to persist, noting that with the stock markets remaining resilient, there is less pressure on policymakers to come to a compromise.
"So far there has been no obvious economic or market cost to the shutdown. If it doesn't hurt, why stop?"
Furthermore, with the Affordable Care Act or "Obamacare" remaining at the center of the battle - there is little room for compromise given it is President Obama's proudest legislative achievement.
—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H