The Week In Review: Will the Government Shutdown Depress the Economy?

Written by Steven Hansen

The headlines across the media are talking about how much the Trump and Pelosi shutdown is costing. Most of it is true to varying degrees but the words are telling only part of the story. This post also reviews the major economic releases issued this past week – although several scheduled releases were not made, victims of the government shutdown.

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For instance, some of the headlines this week.

• How much is the Trump Shutdown costing America? As much as half a billion dollars a day
• The economic cost of the shutdown will soon be the cost of the wall

A great deal of analysis was done on the October 2013 government shutdown. The General Accounting Office (GAO) concluded that the “Economic Effects of the Shutdown on GDP Were Limited“.

We identified and reviewed the analysis of several economic forecasters who predicted the effects of the October 2013 shutdown on the national economy; however, there were no studies or academic research focused on estimating all the economic effects of the shutdown. The forecasters we identified predicted the effect of the shutdown on the real GDP growth in the fourth quarter of 2013—which included the time of the shutdown— to be from 0.2 to 0.6 percentage points as a result of lost productivity of federal workers. These forecasts were conducted either during or soon after the shutdown ended. None of the economic forecasters we interviewed further analyzed the effects of the shutdown since it ended or plans to conduct future analysis as part of a formal study. The economic forecasters we interviewed do not anticipate the shutdown having any longer-term effects on national economic activity.

In January 2014, the Bureau of Economic Analysis (BEA), the agency whose national economic statistics provide a comprehensive view of the U.S. economy in the form of summary measures such as GDP, estimated the direct effect of the shutdown on the real GDP growth in the fourth quarter of 2013 to be a reduction of 0.3 percentage points, which is within the range of estimates provided by the economic forecasters that we identified. According to BEA, the shutdown did not have an impact on current-dollar federal compensation since Congress authorized retroactive compensation for furloughed workers. BEA derived this estimated effect on real GDP from real federal government compensation, one of the components of GDP. BEA adjusted real federal government compensation estimates based on the number of furloughed employees and the number of furlough days, for the reduction in hours worked by federal workers to account for a reduction in services. Thus, BEA estimates show a decline in real GDP based on the lost productivity of the furloughed workers. BEA could not quantify the effects of the shutdown on other components of GDP and the national income and product accounts, such as personal consumption expenditures or private wages and salaries, since they were embedded in the source data that underlie BEA estimates and could not be separately identified.

If the BEA analysis is valid this time, the affect on real GDP would be roughly $150 million per day* [*(0.3% of GDP growth for 16 days or 0.01875% per day) times ($18.5 trillion or $50 billion per day) = roughly $150 million in 2012 dollars]

Sorting through the fog:

Change is almost always has initial negative consequences – When something is changed, the initial affect is usually negative. Stop paying people, and it disrupts their spending. Stop paying contractors – and they stop working.

How many are affected – The headlines talk about 800,000 federal workers, but the count of the number of government contractor employees not being paid are likely in the millions.

Many workers will eventually be paid for not working – The Federal employees will be paid for the time they did not work when the shutdown ends. The Federal contractors mostly will not be paid for not working – and it is this reduction in income which directly slows spending. Much of the analyses on the cost of the shutdown includes the cost of the Federal workers not being paid. The truth is that there will be a time shift on their income – but they will be paid (and they will spend this late income monies). Contractors on the other hand are losing income – and this will affect the economy. I have not seen any good analysis to date on the affects of contractor employees not being paid.

There is revenue the government is losing – There are several agencies that are shutdown which take in income – such as the National Parks. But far more important, the IRS is partially shutdown This obviously will reduce the number of audits. Please find someone who can even begin to throw a number at the cost of the IRS shutdown, On one hand, taxes are a major source of government income – but taxes act as a brake on the economy. Having the IRS shutdown is likely a positive economic event.

The BEA 0.3% GDP study is based on a 16 day shutdown – This shutdown has no end in view. Workers are not seeing any progress to solving the shutdown. Families are living hand-to-mouth. What will they do? Find another job? Economics cannot predict how the affected workers will react. Will they find temporary employment [and for those who find temporary employment and also will be paid after the shutdown ends means that overall these employees will have more income to spend].

Conclusion

Nobody really knows when this shutdown will end – or are able to accurately calculate costs. The longer the shutdown runs – the country falls deeper into uncharted territory. The economy is definitely slowing (caused by the business cycle). When one throws this shutdown on top of a slowing business cycle, it is logical to think it will interact with the slowdown – how much and in what way is the question.

Economic Releases This Past Week

The Econintersect Economic Index for January 2019 significantly declined, and is now below territory associated with normal expansions. This is a departure from the previous three months where the index’s growth rate was little changed.

The following table summarizes the more significant economic releases this past week. For more detailed analysis – please visit our landing page which provides links to our complete analyses.

This week the data was mixed with the rail counts strongly showing an improving economy whilst the Michigan Sentiment survey saying consumers were concerned..

Links To All Of Our Analysis This Past Week

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