United States Politics January 2019

United States

United States: Shutdown ends after 35 days, likely to dent Q1 GDP growth

January 29, 2019

The partial government shutdown, which began on 22 December and dragged on into the longest in U.S. history, appears set to dent the first quarter’s GDP growth print—to the tune of approximately 0.50 percentage points, on a seasonally-adjusted annualized (SAAR) basis. The shutdown started after House Democrats refused to yield to President Trump’s demands for USD 5.7 billion of funding for a border wall with Mexico, one of his major campaign promises. However, it ended on 25 January in a stinging defeat for Trump, who was forced to back down and pass a three-week funding bill to reopen the government and persuade Democrats to agree to negotiate on immigration and border security.

Trump has threatened to declare a national state of emergency over the border wall to bypass Congress and appropriate the necessary funds himself, although it is presently unclear whether he has the constitutional authority to do so. Trump has also threatened to shut down the government again if no agreement is reached by the 15 February deadline. However, this appears unlikely considering congressional Republicans have shouldered the brunt of the blame for the recent deadlock and given the climbdown was seen by observers, including conservatives, as an overwhelming victory for Democrats and a humiliating defeat for the Trump camp. With this in mind, analysts at Goldman Sachs only estimate a 25% chance of a second shutdown occurring after 15 February.

The shutdown affected 800,000 federal workers who were either furloughed or working without pay, missing two paychecks overall; they are, however, expected to receive back pay over the coming weeks. Many more federal government contractors—with estimates ranging from a few hundred thousand to 1.2 million—were also left unemployed and will not be able to recover lost wages. On top of this, service interruptions from the affected federal agencies caused significant disruptions to business activity, including slowing airport activity, due to a lack of Transportation Security Administration officers and air traffic controllers; delays in obtaining permits or federal loans; and hindered the processing of open cases in federal and immigration courts. The Internal Revenue Service, which functioned at minimum capacity during the shutdown, now reportedly has a backlog of unanswered taxpayer letters that will take “at least a year” to resolve.

Overall, the economic impact of the shutdown is likely to be significant in Q1, although some analysts suggest this could be partially compensated for in Q2 as federal workers’ delayed spending is accounted for. The White House’s own Council of Economic Advisers estimated the shutdown to cost 0.13 percentage points (pp) of GDP growth per week on a SAAR basis, or about a 0.50 pp drag on the Q1 GDP print and a 0.20 pp drag on Q4. Analysts at CIBC Economics also projected a shutdown-induced loss of 0.50 pp of GDP in Q1—though their analysis assumed the shutdown would last until the end of January. Meanwhile, projections from the Congressional Budget Office, a non-partisan federal agency, show a 0.40 pp annualized loss of GDP growth in Q1, and a 0.20 pp loss in Q4 2018. However, the congressional watchdog also expects a rebound effect of up to one full percentage point in Q2, due both to delayed spending and a lower base effect from Q1. Finally, economists at Goldman Sachs estimated that 0.15 pp of GDP would be lost in Q1 due to contractors’ lost income, while 0.40 pp of growth would be shifted from Q1 to Q2, reflecting federal furloughs.

Lastly, the federal shutdown interrupted the scheduled data releases for a number of macroeconomic indicators, including the December retail sales and housing starts reports, as well as the upcoming advance GDP estimates for the fourth quarter and the full year 2018. New release dates for these reports have not yet been communicated.

The Federal Reserve expects economic growth of 2.3% in 2019 and 2.0% in 2020. FocusEconomics Consensus Forecast panelists expect GDP to expand 2.4% this year, which is down 0.1 percentage points from last month’s forecast. For 2020, the panel expects the economy to expand 1.7%.


Author:, Economist

Sample Report

Looking for forecasts related to Politics in United States? Download a sample report now.

Download




United States Economic News

More news

Search form