WASHINGTON: A short government shutdown would likely have little impact on the overall US economy, but a protracted budget fight during a time of heightened stock market volatility could worsen an already murky outlook, economists say.
The partial US government closure entered its sixth day on Thursday as President Trump and Congress remained at an impasse over his demand for more funding for a border wall, leaving 800,000 federal workers furloughed or working without pay.
The initial economic effects are likely negligible, despite the hardships for individual employees, because the shutdown initially fell on two weekend days and two federal holidays and affected about a quarter of government offices.
Moreover, much of the suspended federal spending would likely be shifted into the new year, if recent precedent holds. Congress in the past has voted to give furloughed workers back pay once funding is restored, though this isn’t guaranteed. Essential workers who remain on the job will eventually get paid, but not until the shutdown ends.
The danger, analysts said, lies in the prospect of a prolonged stalemate, coming at a time when investors and businesses are already jittery over multiple factors, including US-China trade tensions, rising US interest rates, the decline in stock prices and slowing global economic growth.
“What would be worrisome is if businesses start to lose confidence” in the government, said Kathy Bostjancic, head US financial market economist at Oxford Economics. “They’ll pull back on hiring and investment, and it’ll become a self-fulfilling prophecy, where negativity in the stock market turns to negativity in the (broader) economy.”
Fresh data released on Thursday show the job market is likely to remain on a solid footing in the near future. Jobless claims, a leading indicator of the economy’s future trajectory, ticked down last week. — WSJ
The measure gauges the number of Americans filing applications for new unemployment benefits.
Still, the recent stock market rout appears to be weighing on Americans: a gauge of consumer confidence fell for the second month in a row in December.
S&P estimates this shutdown – the third this year – could shave US$1.2bil off US gross domestic product for each full workweek it continues, a relatively small hit in a roughly US$20 trillion economy.
Historically, shutdowns haven’t significantly affected economic output. Despite the first two shutdowns this year – each lasting less than four days – growth later accelerated and the unemployment rate fell to historic lows, propelled in part by tax cuts and an agreement to boost federal spending.
An October 2013 shutdown lasted for more than two weeks, and still the economy grew in the fourth quarter of that year at the strongest pace in two years. The story was similar in 1995, which saw two shutdowns of less than a week each.
Many forecasters already expect the US economy’s growth to slow in 2019, though to a still solid pace, partly due to the waning stimulus from the tax cut and spending increase.
They worry, however, that the risks to the outlook rise if the shutdown continues into 2019 and becomes harder to resolve, with the Democrats taking control of the House of Representatives Jan 3 and Republicans retaining control of the Senate.
A protracted “federal shutdown would compound the effects of fading fiscal stimulus and act as a drag on an economy already experiencing decelerating growth,” said Beth Ann Bovino, US chief economist at S&P.
Another concern is that an extended budget showdown and hardened gridlock could make it difficult for the White House and Congress to agree to raise the federal borrowing limit, or debt ceiling, next year. Without such an agreement, the government would be unable to pay all its bills, potentially shaking markets and hurting the economy.
The shutdown “just increases concerns of stability,” Bostjancic said. “There are big questions about how we govern going forward.” — WSJ