The shutdown’s effect on the US economy, explained

“The longer it goes on, the bigger the risk is of broader damage.”

The government shutdown isn’t catastrophic for the US economy on a broad level — at least not yet. But real risk lies in letting it go on longer.

The partial government shutdown initiated over an impasse between President Donald Trump and Congress amid his insistence that a funding bill include $5 billion for his border wall will reach its 28th day at midnight on Friday. As a result of the shutdown, some 800,000 federal government workers have been furloughed or are forced to work without pay, and an estimated 4 million contractors could be affected. Small businesses aren’t getting loans, private companies aren’t going public, and federal courts are running out of money.

“The longer it goes on, the bigger the risk is of broader damage,” Ian Shepherdson, an economist at research firm Pantheon Economics, told me. “If the shutdown lasts for the whole quarter, it won’t be trivial.”

Federal government workers will eventually get back pay when the shutdown ends, but right now they’re not injecting as much money into the economy as they would have, and many are struggling to pay their mortgages, credit card bills, and rent. One furloughed employee even pawned her wedding ring for cash, NBC reported — though relatives pooled money to buy it back.

Businesses that depend on federal workers as their customers — say, a deli next to a government building — are losing money they may never recover. The same goes for contractors.

Secondary effects of the shutdown are starting to take a toll. Most experts say the shutdown won’t cause a recession by itself. But it’s not good.

The shutdown alone probably isn’t going to cause a recession

As the government shutdown closes out its fourth week, chatter of a potential recession has increased. But the experts I spoke with said they don’t believe the US economy is headed toward a recession, at least as a result of the shutdown alone.

“I view it more as a corrosive on the economy than a cliff event,” Mark Zandi, the chief economist at Moody’s Analytics, said.

If the recession goes on long enough and there are other shocks to the system, that’s where the real danger comes in — for example, if trade tensions between the US and China increase, or Brexit goes off the rails more than it already has.

“I think [a recession] is an outside risk, and it’s not one that you can entirely dismiss,” Joel Prakken, the chief US economist at Macroeconomic Advisers by IHS Markit, said.

JPMorgan Chase CEO Jamie Dimon, on a call discussing the bank’s earnings this week, acknowledged that growth could be hurt but that the country will just have to roll with the punches. “We just have to deal with that. It’s more of a political issue than anything else,” he said.

One of the more ironic things about what’s going on here is that because of the shutdown, a lot of the government data that would generally tell us how the US economy is doing won’t come out. The jobs report will be released as planned (and, because there’s now a bill to guarantee back pay, it won’t reflect government workers not being paid), but a lot of other economic reports with insights into items such as consumer spending, business orders, and the broader jobs picture won’t come out.

Robert Shapiro, the chair of the advisory firm Sonecon and a fellow at the Brookings Institution, pointed out in a blog post that the Department of Commerce issues the most data on economic performance, and because of the shutdown, a lot of that has come to a halt — data on imports and exports, construction spending, home sales, retail spending, manufacturers’ orders, shipments, and inventories, for example.

“This confounding ignorance about the economy’s current performance matters a great deal,” he wrote.

The longer the shutdown goes on, the less hard data there’s going to be telling policymakers what exactly is happening in the US economy. So, say, when it comes time for the Federal Reserve to make its next interest rate decision, it might have less information to go on.

“There’s a data fog,” Zandi said.

The shutdown is bad for economic growth

There have been varying estimates of what the shutdown will do to economic growth and the GDP in the US. But the consensus is that it isn’t good.

On Tuesday, Kevin Hassett, the chair of the White House Council of Economic Advisers, doubled his estimate of how much the shutdown is costing the economy. He said the administration now projects that the shutdown cuts quarterly economic growth by 0.13 percentage point each week. Across four weeks, that means growth has been cut by about 0.5 percent, per the White House’s calculations.

Hassett told Fox Business that the shutdown shouldn’t have a “long-run effect” on GDP growth.

Prakken, from IHS Markit, said his estimates are about in line with Hassett’s when it comes to the direct impact of the shutdown — namely, some 380,000 workers not producing services they otherwise would. “If it goes on for a month or two months, then it can start to be a measurable impact on GDP growth,” he said.

Whatever growth loss is recorded in the first quarter will likely bounce back in the second, Prakken said, assuming the shutdown ends by then.

Shepherdson, from Pantheon, estimated this week that if the shutdown persists through the first quarter, it could push GDP growth to zero. New York Federal Reserve President John Williams said the shutdown could cut economic growth by 1 percentage point.

“You see a wide range of guesstimates,” Zandi told me. But the broad takeaway is that the shutdown isn’t good.

There are a lot of things going on beyond unpaid workers

The shutdown’s effects are showing up in a lot more places than furloughed and unpaid government workers and contractors. Those effects are harder for economists to estimate, but they’re very real.

The Securities and Exchange Commission has told companies planning to go public in January to delay their plans, and the shutdown could imperil or at least put off high-profile IPOs from companies such as Uber, Lyft, and Pinterest. All pending administrative proceedings at the SEC, except for emergencies, have also come to a halt.

Corporate deals and mergers and acquisitions are also feeling the impact. The office supplies company Essendant said this month that its bid to combine with Staples was being hurt by the shutdown because the Federal Trade Commission has to approve the deal. A federal judge has rejected a request from Justice Department lawyers to delay a response in the CVS-Aetna merger because of the shutdown, telling them to “roll up their sleeves” and get to work — presumably without pay — anyway.

Airlines say they’re losing business because of the shutdown.

The shutdown has cut off approvals of Small Business Administration loans, and businesses needing permits from a broad range of government entities have found themselves out of luck: brewers who can’t get their new beer labels approved, airlines that can’t add new planes to their fleets. Farmers, already hurting from tariffs, are being further imperiled by the shutdown.

“These people are on the edge, and finding their local Department of Agriculture office closed is a really big problem,” Shepherdson said.

The Trump administration is trying to “triage” and minimize some of the shutdown’s effects, Zandi said, such as calling back thousands of IRS workers to work without pay to make sure tax refunds go out.

“The administration is working to keep the train running to the degree that it doesn’t come off the rails,” Zandi said. “It’s wobbling, and it’s moving more slowly, and it’s not going to perform as well, but it’s still not going to derail.”

But that can only go so far.

The Trump administration won’t be able to slow the effects of the shutdown forever, especially as it seeps further into the American psyche — consumer confidence could take a hit, businesses considering making a purchase might hold off.

“One thing that we worry about is what is going to break consumer confidence, what is going to shake consumers and shake business confidence, what is going to make people worried enough that maybe they pull back a little bit,” Betsey Stevenson, an economist at the University of Michigan and former Obama administration official told Politico’s Ben White. “And that’s why a lot of people are a bit worried that the government shutdown could have long-lasting negative effects if it goes on long enough that it shakes both consumer and business confidence.”

The University of Michigan’s Consumer Sentiment Index in January fell to its worst level since Trump’s election.