The federal government remains shuttered for a second day, as of mid-afternoon on Sunday (January 21), Washington time. Senate moderates are struggling to find a political solution, albeit without success so far. Meantime, what should we expect for economic blowback if the political stalemate endures?
Economists advise that the short-term effects will be minimal. “A shutdown, particularly if it’s short, wouldn’t be a catastrophic event,” notes Beth Ann Bovino, chief US economist at Standard & Poor’s. “The economy is chugging along at a pretty nice pace. This would be like getting a couple dents in our nice, shiny fender.”
A 2015 study by the Congressional Research Service reported that each week of a government shutdown cuts GDP growth by an estimated 0.1 percentage point.
Meanwhile, Bloomberg economists last week estimated that “a government shutdown that lasted two and a half weeks in 2013 subtracted 0.30 percentage point from quarterly GDP.”
A 2013 report by the Obama administration’s Council of Economic Advisers explained:
A number of private sector analyses have estimated that the shutdown reduced the annualized growth rate of GDP in the fourth quarter by anywhere from 0.2 percentage point (as estimated by JP Morgan) to 0.6 percentage point (as estimated by Standard and Poor’s), with intermediate estimates of 0.2 percentage point and 0.5 percentage point from Macroeconomic Advisers and Goldman Sachs respectively.
In the here and now, Trump’s Council of Economic Advisers assumes that every week of a shutdown will shave annual economic growth by 0.2 percentage point, according to The New York Times.
Which federal agencies (and related services) will suffer the most? Housing and Urban Development (HUD) will take the biggest hit, according to the Times, based on estimated percentages of employees who will stay home. A projected 96% of HUD’s workers will be cooling their heels for the shutdown holiday. In second place is the Environmental Protection Agency at 95%, followed by the Department of Education (95%), the Department of Commerce (87%), and the Department of Labor (83%).
The good news is that recent economic momentum has been picking up, which will provide a cushion against any fallout from the political dysfunction in Washington. This Friday’s fourth-quarter GDP report is on track to post a 2.9% increase, according to Econoday.com’s consensus forecast. That’s modestly below Q3’s solid 3.2% advance, but economists generally are looking for another healthy improvement in quarterly output.
That leaves the question of how long Washington’s gridlock will last? By some accounts, a solution could last for more than two weeks, courtesy of a pessimistic political calculus from the Trump administration’s bean-counter-in-chief.
“I think Democrats want to see the President give the State of the Union under a shutdown,” White House budget chief Mick Mulvaney said yesterday on “Fox News Sunday.” By that logic, stalemate will continue through at least Jan. 30, when Trump addresses both chambers of Congress.
Hyperbole? Maybe, but if the logjam doesn’t break later today, the odds for a quick solution will dim further, Senate Majority Leader Mitch McConnell (R-Ky) warned. “This shutdown is only going to get a lot worse tomorrow. A lot worse,” he said.
Disclosure: Originally published at Saxo Bank TradingFloor.com