How is the government shutdown impacting the economy?Contributors Dr. David Kelly, Jordan Jackson
As of last week, the partial government shutdown is officially the longest shutdown on record. While we believe the US will avoid a recession in 2019, one of the greatest risks is the economic impact of the shutdown, which grows more damaging the longer it stays in effect.
The government shutdown, now in its fourth week, is negatively impacting the economy in four broad ways:
First, there is the direct hit to GDP from work not being done by federal workers and income not being received. There are roughly 380,000 workers on furlough and a further 420,000 who are working without pay, bringing the total number to 800,000 employees impacted. 380,000 and 800,000 represent 0.28% and 0.53% of total payroll employment respectively. If the shutdown were to continue for the entire first quarter, it would thus directly knock roughly 1.1% annualized from GDP and 2.1% annualized from wage income (assuming the hourly output and wages of the impacted federal are similar to those of the general workforce). These effects would be amplified by the multiplier effects of spending not done by these workers due to a lack of ready income and by all the federal contractors who are also not being paid.
Second, there is the growing indirect impact of the shutdown. If income tax refunds were to be delayed, even though the Treasury Department currently believes they will be paid on time, the impact on consumer spending would be huge. In addition, if TSA workers or air traffic controllers stopped showing up on mass, the impact on the air traffic system and the U.S. economy could be even worse.
Third, there is a negative impact on consumer and business confidence. Falling consumer confidence has wide-ranging impacts which can result in softening loan demand, further slowing in housing activity and, of course, a hit to consumption. Weakening business confidence may cause businesses to postpone hiring and investment decisions, broadly threatening economic growth.
Finally, with the lack of government data releases on the status of the U.S. economy, there is a growing uncertainty on how the economy is performing. In its absence, many consumers, businesses and investors may assume the worst.
While the stalemate in Washington shows little sign of resolution, there is increasing pressure on both sides to come to a compromise, as a shutdown does not bode well for either party’s base. Moreover, every day the government remains closed, the impacts increase in their significance. Given this, we expect the White House and Congress to come to an agreement in the days ahead to reopen the government, removing a cloud of uncertainty and providing some relief to markets.
U.S. government shutdowns and their duration
Number of days