US government shutdown unlikely to cause immediate recession

Federal government shutdowns have become so common in recent years that forecasters have a good read on how another government shutdown will affect the American economy. The answer is very simple. The longer the shutdown lasts, the more damage is likely to occur.

Economists on Wall Street and within the Biden administration have concluded that a short-term shutdown is unlikely to significantly slow the economy or push it into recession. This assessment is based in part on evidence from past episodes in which Congress defunded many government projects.

However, a prolonged government shutdown could harm growth and possibly hurt President Biden’s re-election prospects. This comes on top of a series of other factors expected to weigh on the economy in the final months of the year, including high interest rates, the resumption of federal student loan payments next month, and a potentially prolonged United Auto Workers strike. will be joining.

A federal government shutdown doesn’t just hurt growth. Consumer confidence, which fell for the second consecutive month in September due to rising gasoline prices, is likely to worsen further. Economists at Goldman Sachs recently found that while the Conference Board’s Consumer Confidence Index fell by an average of 7 points in the month the previous shutdown began, most of that decline was reversed in the month after reopening. It pointed out.

Gregory Daco, chief economist at EY Parthenon, said the government shutdown would not be a “major change in terms of the trajectory of the economy.” However, he added, “There are concerns that if combined with other headwinds, this could be a major drag on economic activity.”

Jared Bernstein, chairman of the White House Council of Economic Advisers, said in a statement Wednesday that the council’s internal estimates suggest that each sustained government shutdown could result in a loss of 0.1 to 0.2 percentage points in quarterly economic growth. He said that it suggests that there is a sex.

“The programmatic effects of the government shutdown will also cause unnecessary economic stress and losses that will not necessarily be reflected in GDP. “From the elimination of Head Start slots for children to the crisis in nutrition assistance for nearly 7 million mothers and children,” Bernstein added. “It is irresponsible and reckless for a group of House Republicans to threaten a shutdown.”

Economists at Goldman Sachs estimate that growth will decline by about 0.2 percentage points for each week the government shutdown continues. The main reason for this is that most federal workers will go unpaid during the government shutdown, immediately draining spending power from the economy. But Goldman researchers expect the same amount of growth to increase in the post-shutdown quarter as federal jobs recover and furloughed employees receive back pay.

The estimate is consistent with previous research by economists from the Fed, Wall Street and previous presidential administrations. Trump administration economists estimated that the month-long government shutdown in 2019 reduced growth by 0.13 percentage points per week.

After the government shutdown ended, the Congressional Budget Office estimated that real gross domestic product fell by 0.1% in the fourth quarter of 2018 and 0.2% in the first quarter of 2019. The bureau said most of the lost growth will be recovered, but estimates that annual GDP in 2019 will be 0.02% lower than it would have been otherwise, amounting to a loss of about $3 billion. Previous government shutdowns have left few permanent scars on the economy, as growth and confidence tend to recover quickly. Some economists worry that this may not be the case today.

Daco said federal employees may have spent less without the government shutdown, and government contractors may not be able to recover all of the lost business.

A prolonged government shutdown would force the closure of federal statistical agencies and delay the release of key government data on the economy, such as monthly reports on employment and inflation. This would effectively arm Fed policymakers with the information they need to decide whether to raise rates again in the fight against inflation, potentially posing greater risks to growth than in the past. be.

The economy appears to be healthy enough to absorb some temporary damage. The consensus forecast from top economists is for growth this quarter to approach an annualized rate of 3%. But economists expect growth to slow in the final months of the year, raising the risk of a recession if the government shutdown lasts several weeks.

Diane Swonk, chief economist at KPMG, said she expects gross domestic product to grow by about 4% in the third quarter, but slow to about 1% in the fourth quarter. He said a two-week shutdown would have limited impact, but a full quarter would be more problematic and could send GDP into negative territory.

“If you start chipping away even a tenth here and there, that’s pretty weak,” Swonk said.

Swonk said a government shutdown could further signal political dysfunction in Washington, spooking investors and pushing up yields on U.S. Treasuries and leading to higher borrowing costs.

Biden administration officials had hoped to avoid such dysfunction when they reached a deal with Republicans in June to raise the nation’s borrowing limit. The agreement included federal spending caps intended to serve as a blueprint for Congressional spending. A faction of House Republicans is pushing for even deeper cuts, forcing Congress to shut down.

Michael Linden, a former economic aide to Mr. Biden and now a senior policy fellow at the Washington Center for Equitable Growth think tank, said the immediate economic impact of the government shutdown is forcing House Republican leaders to move quickly on funding legislation. He said it may be forced to pass. To restart the government.

“There’s a reason why closures tend to be so short,” Linden said. “They end up creating a mess that people don’t like.”