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News | Question of the Week, WC 7th January
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Question of the Week, WC 7th January

Q: What impact will the government shutdown have on economic growth?

A: The partial government shutdown is now the longest on record, with little chance of a near-term resolution.  It has now lastest long enough that we have to start thinking about the impact on first quarter GDP growth, which was already set to slow as a result of the drop in stock prices in the fourth quarter and the fading fiscal push.

The direct impact on growth is straightforward.  The 800K government workers who aren't being paid amount to 0.53% of payrolls.  Government employees earn more than average, so the loss of aggregate income growth would be larger than these raw numbers suggest.  If reported GDP growth was headed for an annualized 2.5% rate—our working assumption—before the shutdown, then the direct effect of all 800K workers being out for the whole quarter would be directly to reduce it to just 1/4% or so.

We have no way of estimating the impact on government contractors, or the second round effects when those business fail, or have to delay paying their employees, subcontractors, suppliers and creditors, but it will not be trivial.  Accordingly, If the shutdown lasts through the whole quarter, we'd look for an outright decline in first quarter GDP.  

Some of the ground lost would be recovered, because government employees working without pay likely will be compensated for their time once the shutdown is over, and Congress could enact legislation so that furloughed workers will be paid for the work they would have done if the shutdown hadn't happened.  But firms and farms which go bust as a result of the shutdown can't be magically resurrected when itìs over.  

This worst-case scenario probably won't come to pass, because we think the president will come under enormous pressure from his own party, especially from Senators who will be seeking re-election in blue states next year.  Still, even if the shutdown is over by the end of the month, the hit to growth will be material, and it will hurt first quarter earnings, to say nothing of the costs and misery imposed on government employees, contractors and their families.

Ian Shepherdson, Chief U.S. Economist

Pantheon Macroeconomics

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Posted: 14th Jan 2019

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