Citi: Economic Damage is Done, Debt Deal Won’t Cut It

Citigroup (NYSE:C) took on perhaps the most bearish tones yet in the nation’s ongoing battle over the budget and debt. In a note to clients on Friday, the number three U.S. bank by assets said it sees GDP growth dipping as low as 1% in the fourth quarter even if Congress does manage to stop squabbling and raise the debt ceiling before Oct. 17.

The bank noted it trimmed its fourth-quarter forecast down to 2.4% on just the shutdown effects alone, but with the threat of default still lingering in the air despite two days of continued talks among Congressional leaders and the president at the White House, it notes is still very possible that current quarter growth estimates could be slashed further to just 1% if lawmakers fail to solve both the fiscal crises still plaguing Capitol Hill.

What’s worse, the uncertainty in Washington is causing volatility not only occasionally in the U.S. financial markets, but also in abilities to measure growth for the next few quarters and beyond. That’s because many government-sponsored data reports have been halted due to furloughed staffs.

“For now, it seems unlikely that we will get initial estimates of 3Q growth on time in two weeks, and that makes it harder still to gauge the recovery’s momentum ahead of the recent disruptions. The favorable fundamentals beneath the clouds do seem to show through in surveys. Both the small business sector and today’s consumer sentiment readings revealed reassuring signs,” the bank noted Friday.

In fact, private equity giant Carlyle Group (NYSE:CG) stepped in to fill the data void left by the shutdown. It published its own proprietary calculations from the more than 200 companies in its portfolio, for data like GDP, retail sales, durable goods orders, and others, based on statistics from the company.

“Several of our monthly data series are highly correlated with, and therefore may serve as reliable proxies for, U.S. official data that are not currently reported due to the government shutdown,” Carlyle’s chief economist, Jason Thomas, said.

Citi doesn’t stand alone in its growing concerns for the nation’s economic wellbeing. In a note to clients last week, Goldman Sachs (NYSE:GS) warned if the shutdown continued for a prolonged period, it would cut the bank’s current forecast of 2.5% 4Q GDP growth by a quarter to a half of a percentage point.

With all uncertainty has also grabbed the Federal Reserve’s attention as indicated In minutes from the central bank’s latest policy setting meeting released this week.

“Heightened uncertainty about the course of federal fiscal policy over coming months, including the potential for a government shutdown or strains related to the debt ceiling debate…posed downside risks to the economic outlook,” the Fed said.

Barclays added the turbulence further blurs the outlook about when the Fed might begin tapering its $85-billion-per-month bond-buying program, known as QE3. The bank noted if the gridlock at the Capitol is not resolved soon, tapering could be thrown all the way to March, rather than its baseline assumption of December. Before all the fiscal drama, Wall Street broadly expected the Fed to begin the tapering back in September.