Shutdown costs piling up
A partial government shutdown began on 22 December when Congress failed to pass an appropriations bill that could have kept the government open. While we have long recognized downside risks stemming from government policy and dysfunction in Washington, this shutdown caught us by surprise. President Trump had signaled that he was willing to keep the government open temporarily without border wall funding, but when he abruptly changed his mind, the Senate could not muster the 60 votes that would have been needed to pass a bill he would sign.
The economic cost of a shutdown is always difficult to estimate. Compared to previous shutdowns, the impact this time around is smaller than usual, because many government agencies were already funded through the normal budget process. Further, the Trump administration has tried to minimize the damage through various means, most recently reclassifying 46,000 furloughed government employees as essential and having them go back to work, unpaid. This includes many IRS employees, and it appears likely that personal income tax refunds will be paid even if the government is still in shutdown when tax season starts on 28 January.
Even so, like the snow outside my window, the costs are piling up.
According to an article in the New York Times, Kevin Hassett, chairman of the Council of Economic Advisers, now estimates that each week the shutdown lasts reduces quarterly economic growth by 0.13%-points. That is in line with our own estimates and about half the impact of previous shutdowns. Even so, that works out to roughly USD 1 billion per day, so the economy has already suffered damage much greater than Trump's demand of 5.6 billion for the border wall.
In our view, the economic cost of the shutdown will accelerate the longer it continues. Some government agencies had enough spare funds to continue operations for a short period, and that money is running out. The impact goes way beyond government workers not being paid. For example, IPOs are being delayed because most Securities and Exchange Commission workers are on furlough. Airlines can't get approval to start flying new routes or using new airplanes. Some retailers are no longer able to process food stamp payments because their authorization expired and can't be renewed. Federal courts are closing.
Further, it is unreasonable to assume that federal workers will keep doing their jobs without pay indefinitely. It may be difficult and expensive to find and train replacements for workers who quit. The long term damage to the government's workforce could be considerable.
I once saw a short film about an F-1 racing team testing new engine designs. They would set the engine running at full throttle and wait until, glowing red from the heat, the most fragile part would break and the engine would stop. We are now running a similar experiment on the economy. It is difficult to predict what part will break first, but you can already smell the smoke. For example, the University of Michigan survey of consumer sentiment fell sharply in early January. The sub-index on recent changes in business conditions, which was at a record high last February, plunged to its lowest level since late 2011. The Fed's Beige Book also noted deteriorating business sentiment.
We expect that rising political pressure will lead to a breakthrough that ends the shutdown soon. If that view turns out to be wrong, the shutdown could push first quarter growth into negative territory.
By Brian Rose, Senior Economist Americas
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