President Obama met bank executives including Goldman Sachs chief Lloyd Blankfein on Wednesday as economists, business leaders and European officials warned that the US government shutdown threatens to plunge the economy into a "deep and dark recession".
The meeting with finance chiefs came as the shutdown entered its second day and Obama prepared to meet with Republican leaders in the hope of ending the impasse. Business leaders expressed concern about the shutdown, and about a looming battle over the nation's $16.7tn debt ceiling.
Treasury secretary Jack Lew has warned that the US could default on its debts if the limit is not raised soon.
"There's precedent for a government shutdown; there is no precedent for a default," Blankfein told reporters after the meeting. He warned that the economic recovery was already "shallow".
Earlier on Wednesday, the European central bank president Mario Draghi warned that a protracted US shutdown could impede economic recoveries around the world. "If it were to be protected, it is certainly a risk to the US and the world recovery, so we need to have it present in our minds," he said.
Business Roundtable president John Engler said the shutdown and deficit row were already harming the economy. "America's business leaders are extremely disappointed by the failure of the nation's political leaders to reach an agreement on funding the basic operations of the federal government," he said.
The lobby group represents the CEOs of many of America's largest companies, including American Express, Boeing and Goldman Sachs. Engler said the group had already warned Congress that even a brief shutdown would have serious economic consequences.
"At a time when both parties should be focused on job creation and policies to accelerate growth, their chronic disagreement and gridlock are actually undermining confidence, putting people out of work and hurting the economy," he said.
The impact of the shutdown, now in its second day, is already being felt beyond government employees and frustrated tourists blocked from entering federal parks. The Internal Revenue Service has stopped issuing the W2 proof-of-income forms for some borrowers who need them to secure a loan.
The Federal Housing Administration, which currently endorses about 15% of the entire single-family mortgage market, is operating with limited staff.
Doug Lebda, the chief executive of mortgage company Lendingtree, said in a blogpost that the impact on the housing market would be minimal as long as a resolution was found soon. But it would worsen as a shutdown continued: "The longest government shutdown lasted 21 days. Let's hope US lawmakers don't try to beat the record," he wrote.
US stock markets fell Wednesday after a brief recovery Tuesday as investors bet that the shutdown was likely to continue. Mark Zandi, the chief economist of Moody's Analytics, said the shutdown was likely to cause bigger losses for investors if it continued into next week.
But he warned that would be nothing compared to the "Pandora's box" that would be opened if no deal on the debt ceiling was done before 17 October deadline. Congress must agree to raise the US's $16.7tn debt ceiling by that date or risk being unable to meet its obligations.
"That would completely undermine confidence among business people," he said. "The collective psyche will weaken – and rapidly."
Zandi, a former economic adviser to Republican presidential hopeful John McCain, said the economy would enter a "very deep recession, very quickly, and a very dark recession." Hiring would drop off immediately and the Federal Reserve would have no power to act, he said.
"We are in a very different place to 1995-96 [the time of the last government shutdown]," he said. "At that time, interest rates were higher, unemployment was lower and we were on the cusp of the tech boom."
With interest rates now at historic lows and the Federal Reserve already pumping $85bn a month into the economy through its stimulus programme, Zandi said this time around there was very little the Fed could do to halt a deep slide into recession. The recession would be "so dark that I can't imagine policymakers going down that route," he said.
A stopgap solution was unlikely to reassure business or investors, he said.
Moody's calculates that political uncertainty has cost the US economy 1m jobs since before the recession as businesses have delayed hiring for fear of changes in fiscal policy.
Last year researchers at the San Francisco federal reserve that heightened policy uncertainty had become an increasing drag on job market since the recession began. The researchers concluded that recruitment wanes as uncertainty rises and that by the end of 2012, the unemployment rate would have been close to 6.5% instead of the reported 7.8% if not for the political infighting.
"For the sake of the US economy, Congress and the administration must sit down together and quickly find a solution to fund the federal government and avoid yet another perilous showdown over raising the debt ceiling," said Engler.
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