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POLITICO

Shutdown’s economic damage: US$1 billion a week

  • The mounting toll is adding new risks to the Trump administration’s economic hopes for 2019
PUBLISHED : Thursday, 10 January, 2019, 2:51pm
UPDATED : Thursday, 10 January, 2019, 8:21pm

This story is published in a content partnership with POLITICO. It was originally reported by Victoria Guida on politico.com on January 9, 2019.

As US federal workers face the prospect of missed paycheques during the partial government shutdown, their financial reality is rippling out into the broader economy.

The roughly 800,000 government employees who are either furloughed or working without pay will be forced to start slashing their consumer spending when paycheques don’t appear this week.

Private-sector contractors and other workers tied to the government are already seeing damage from lost business.

And a hit to the nation’s financial standing is on the horizon with a warning from Fitch Ratings on Wednesday about downgrading the government’s credit rating if the shutdown persists.

Estimates from President Donald Trump’s chief economist peg the cost to the overall US economy at about US$1.2 billion for each week the shutdown persists.

While that’s just 0.05 percentage points off the GDP growth rate, it could be among the factors complicating the administration’s aspiration of reaching sustained 3 per cent growth.

The shutdown – in its 20th day Thursday – could also cost the US government more than a billion dollars in lost productivity for 350,000 workers who are forced to stay home.

The government will likely give back pay to furloughed workers in addition to those forced to perform their duties without pay during the partial shutdown.

The Obama administration estimated that the payroll cost alone for the 16-day government shutdown in October 2013 cost US$2.5 billion, not counting lost revenue from government entities like national parks that were unable to collect fees.

“We’re going to be paying people for half a month of work they didn’t do,” said Tyler Evilsizer, research manager at the bipartisan Committee for a Responsible Federal Budget.

Only a quarter of the government is unfunded, so the price tag for this shutdown would take longer to reach the 2013 figure.

“It’s little in the scope of the federal budget, but it’s a lot in the context of, this [shutdown] is completely unnecessary,” Evilsizer added.

The shutdown comes at a time when the US economic outlook was already highly uncertain.

Global growth is slowing, trade tensions are simmering, the effects of the Fed’s steady interest rate hikes are starting to take hold, and the manufacturing and housing sectors are showing some signs of weakness.

Analysis: Donald Trump runs into a wall as shutdown nears longest in US history

All those factors were already leading economists to predict slower growth in 2019 than last year, which still might fall short of Trump’s 3 per cent goal.

But the economy has also continued to show signs of strength. The Labour Department – able to release data because it’s fully funded – announced on Friday that the US added 312,000 jobs in December and that wages rose more than 3 per cent for the third consecutive month.

The jobs number could be a lot weaker in January if the shutdown continues through next week, when the department conducts its payroll survey; most of the furloughed workers would be counted as unemployed.

Additionally, jobless claims of private contractors have probably already increased by as much as 15,000, according to Michael Feroli, chief US economist at JPMorgan.

That all means monthly jobs could decline in January for the first time since 2010.

Beth Ann Bovino, S&P Global Ratings chief US economist, estimated that real GDP growth would be lowered by a tenth of a per cent for every two weeks that the partial shutdown persists, which she said came out to about US$1.2 billion per week.

Kevin Hassett, chairman of the White House Council of Economic Advisers, put forward a similar estimate last week.

“I don’t really expect to see big economic effects of this … assuming that it ends relatively quickly,” Hassett told reporters.

But some estimates suggest the effect could be larger. JPMorgan’s Feroli said the effect could be as much as two to four times that much each week the shutdown continues.

Ethan Harris, head of global economics research at Bank of America Merrill Lynch, said the shutdown had a smaller impact at its start, particularly because it was during the holidays.

But “each month that it goes forward, the effect grows exponentially,” Harris said.

“If it goes on for a quarter … now you’re starting to really change spending habits.”

He said the fact that the shutdown is only partial might make it drag on much longer than it otherwise would.

“It kind of feels like it needs to go on for a while to convince people to change” policy because they start feeling negative effects, he said.

The political dysfunction underlying the shutdown led to the warning from Fitch Ratings about potential damage to the US government’s triple-A credit rating.

“The ongoing shutdown suggests that the current arrangement of political forces, following November's midterm elections that resulted in a divided Congress, limits policy consistency,” the ratings firm said in a press release Wednesday.

“The main implication for our US sovereign credit view will depend on whether we feel this shutdown foreshadows a more pronounced destabilisation of fiscal policymaking, including brinkmanship over the debt limit,” Fitch added.

The partial shutdown will also lead to a range of harder-to-quantify effects from a lack of access to certain government services – a topic that has been a steady drumbeat from progressive consumer advocacy groups.

“The government shutdown that President Trump has proudly taken credit for is having a painful impact on over 800,000 federal workers’ paychecks, our national parks, food safety, low-income families, our system of regulatory safeguards and enforcement, and much more,” said Lisa Gilbert, vice-president of legislative affairs at Public Citizen.

All those effects could wear down consumer and business confidence, further cutting into the economy's momentum.

https://www.politico.com/story/2019/01/09/shutdowns-economic-damage-1-billion-a-week-1071609