As Shutdown Continues, Concern Turns To Its Economic Impact

As the shutdown drags on, it's beginning to have an impact on the economy.

As the Federal Government shutdown enters its twenty-sixth day, worries are growing that it could have a broader impact on the economy going forward:

The partial government shutdown is inflicting far greater damage on the United States economy than previously estimated, the White House acknowledged on Tuesday, as President Trump’s economists doubled projections of how much economic growth is being lost each week the standoff with Democrats continues.

The revised estimates from the Council of Economic Advisers show that the shutdown, now in its fourth week, is beginning to have real economic consequences. The analysis, and other projections from outside the White House, suggests that the shutdown has already weighed significantly on growth and could ultimately push the United States economy into a contraction.

While Vice President Mike Pence previously played down the shutdown’s effects amid a “roaring” economy, White House officials are now cautioning Mr. Trump about the toll it could take on a sustained economic expansion. Mr. Trump, who has hitched his political success to the economy, also faces other economic headwinds, including slowing global growth, a trade war with China and the waning effects of a $1.5 trillion tax cut.

To blunt the shutdown’s effects, the administration on Tuesday called tens of thousands of employees back to work, without pay, to process tax returns, ensure flight safety and inspect food and drugs. But some people involved in the shutdown discussions in the White House have privately said they anticipate that Mr. Trump will grow anxious about the economic impact in the coming days, accelerating an end to the stalemate. Others close to the president believe Mr. Trump has leverage and are encouraging him to stand by his demands.

For now, the White House shows no signs of being ready to relent, and Kevin Hassett, the chairman of the Council of Economic Advisers, continued to blame Democrats for the economic damage.

“Congress needs to look at the harms that we’re talking about,” Mr. Hassett said, “and address them.”

Mr. Hassett said on Tuesday that the administration now calculates that the shutdown reduces quarterly economic growth by 0.13 percentage points for every week that it lasts — the cumulative effect of lost work from contractors and furloughed federal employees who are not getting paid and who are investing and spending less as a result. That means that the economy has already lost nearly half a percentage point of growth from the four-week shutdown. (Last year, economic growth for the first quarter totaled 2.2 percent.)

Mr. Hassett, attempting to illustrate the pain caused by the shutdown, said on Tuesday that one of his furloughed staff members had begun driving for Uber to make ends meet.

Mr. Hassett said it was possible that the damage could grow. He also said much of the damage should be repaired once the shutdown ends and workers get back pay. But he acknowledged that the shutdown could permanently reduce growth expectations if businesses and markets begin to expect that Congress and the president will repeat the experience again and again.

Some economists have begun to warn that such a situation is likely and that economic confidence could be undermined as businesses, consumers and investors lose faith in the ability of political leaders to find agreement on issues like raising the federal debt limit and approving trade deals.

That lack of confidence could snowball into a self-inflicted economic contraction on the heels of what appears to have been the nation’s strongest year of growth since the 2008 financial crisis. Financial markets are already highly volatile amid concerns about the trade fight with China, slowing global growth and signs of weakness in American housing and manufacturing sectors.

“The economy could easily stall in the first quarter, and then the question is what happens in the second” if the shutdown persists, said Ian Shepherdson, the chief economist at Pantheon Macroeconomics. “The longer it goes on, the longer it takes to recover.”

If the shutdown continues through the end of March, Mr. Shepherdson said in a research note, he would expect the economy to shrink in the first quarter. While federal workers are likely to receive back pay once the furlough ends, most government contractors will not, and the longer spending is depressed, the higher the risk that the businesses they run or patronize will fail, Mr. Shepherdson said.

The shutdown “is threatening to derail this economic expansion,” Bernard Baumohl, the chief global economist for the Economic Outlook Group, said in a research note on Tuesday. Its effect on federal workers’ spending plans is particularly worrisome for the automotive and housing markets, which were already showing signs of trouble before the shutdown, he said.

As time goes on, the economic impact of the shutdown is only likely to increase, of course. The most direct impact, of course, will be felt by Federal workers and contractors who are not getting paid because of the funding lapse, but that impact will quickly grow to include sectors of the economy beyond the immediate universe of the Federal workforce. Businesses that, in turn, do business with Federal contractors, for example, will be impacted because they too are likely to go unpaid at least in the short-term. Additionally, in Washington, D.C. and elsewhere, businesses that rely on Federal workers, such as restaurants and other establishments, are already starting to feel the impact of the shutdown. Many of these are businesses that depend heavily on such workers for foot traffic during the course of the business week which suddenly find that their customer base is significantly reduced. While these are seemingly small examples of the impact of the shutdown, they are adding up by the day and across the country.

Despite all of this, there’s little sign that the growing crisis is going to be resolved any time soon. The President continues to refuse to relent on his demand for funding for a border wall that Democrats clearly are not going to agree to. House Republicans remain intensely loyal to the President to the point that, other than a handful of about twelve members of the House GOP Caucus, there is virtually no chance that they will turn against him at any point in the future. The one group that could have an impact on how this shutdown continues to unfold, Senate Republicans, are following Mitch McConnell’s lead and staying on the sidelines of the fight, claiming that it is Democrats who must come to the table to make a deal. So far, only a handful of those Republicans in the upper chamber have given an indication that they might be willing to either pressure McConnell to act or to cross the aisle and support legislation to reopen the government. The problem with that is that, without significantly more Republican support in both chambers of Congress, there is little prospect of this being resolved due to the fact that there would be little to no support for overriding a Presidential veto should the President respond in that manner. Because of that, the prospect of this shutdown being resolved any time soon looks as unlikely as it did on December 22nd.

FILED UNDER: Borders and Immigration, Congress, Deficit and Debt, Donald Trump, Economics and Business, Politicians, US Politics, ,
Doug Mataconis
About Doug Mataconis
Doug holds a B.A. in Political Science from Rutgers University and J.D. from George Mason University School of Law. He joined the staff of OTB in May 2010. Before joining OTB, he wrote at Below The BeltwayThe Liberty Papers, and United Liberty Follow Doug on Twitter | Facebook

Comments

  1. SC_Birdflyte says:

    It would a lot of patient work, but what needs to happen is a legislative fix that includes the following: 1. Impounding the salaries of Congress, all Congressional staffers, the President, the Cabinet, and all White House staffers. 2. No back pay for said personnel until 60 days after the shutdown ends. A better solution would be to continue government funding on autopilot, effective at 12:01 a.m. October 1. Any funding increases or funding cuts after said time require a supermajority of both houses. It’s a blunt solution, but sometimes a 2 x 4 is the only educational tool that will work.

  2. 1. Impounding the salaries of Congress, all Congressional staffers, the President, the Cabinet, and all White House staffers. 2. No back pay for said personnel until 60 days after the shutdown ends

    This would appear to violate the 27th Amendment.

    As for the rest of your comment, prior to the late 1970s, budget impasses such as this did not result in lapses in government funding. This is why there was no real impact from disputes like this that took place between the President and Congress under Presidents prior to President Reagan. It was just prior to when Reagan took office that this changed, but I don’t know if that was due to a change in the law or a change in the way the applicable law was interpreted.

  3. HelloWorld! says:

    It is my understanding that McConnell is refusing to let the senate vote on a bill that would reopen the government because he fears a veto. This clearly puts the state of the shutdown, and it’s economic effects at the feet of the republicans.

    I think the Dems should give them a bill that includes money for a wall, but only after it goes to a special election so the country can vote on if we think a wall should be in the future of the United States or not.

  4. KM says:

    Trump’s now trying to order the furloughed and unpaid workers back to work in order to blunt the damage his shutdown is doing. In other words, he’s trying to prevent voters from suffering ill effects due to his stupidity without realizing not paying almost a million people for going on a month will still leave a huge economic impact. Millions and millions of people are going to feel this in their pocket books even if they are not employed by the government – sales for the quarter will be down, stocks start to drop, inventory left on shelves. Businesses on the brink will close.

    Putting a tourniquet on a wound while ignoring the internal bleeding will not save you. It won’t even buy you much time since the blood loss isn’t being stemmed at it’s worst. Idiots that kept saying “I don’t notice a shutdown” aren’t crowing that anymore – it’s just a matter of how badly you can hurt them before they start rioting and demanding the government re-open.

  5. gVOR08 says:

    You mean to say the economy depends on the little people spending money? How can that be? We cut rich peoples taxes. Wasn’t that supposed to make everything good again? /s

  6. James Pearce says:

    @KM:

    In other words, he’s trying to prevent voters from suffering ill effects due to his stupidity without realizing not paying almost a million people for going on a month will still leave a huge economic impact.

    The suffering is the point. If it’s unendurable, then a different strategy is needed. (Spoiler alert: A different strategy is needed.)

    Off-topic: The Nuggets are no longer in first place in the Western Conference.

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  7. Kathy says:

    Dennison keeps hitting his head with a hammer, and wondering when that will finally cause his headache to go away. The Republican party stands meekly on the sidelines, and the base yells “hit harder!”

  8. KM says:

    @James Pearce :

    The suffering is the point for the right people.

    Fixed it for you. Straight from the mouth of a Trumpkin, they *wanted* him to hurt certain people but not them. Trump’s trying to order workers back because he’s noticing the wrong people are getting smacked in his fit. He was just fine with workers getting screwed since he thinks they’re all Dems anyways. Now that it’s his voters feeling it and businesses starting to feel nervous, he’s running out of ways to soften the blow.

    The fact that Trump’s trying this at all means the current strategy of not giving baby his bottle and letting public pressure get to the GOP is working just fine.

  9. James Pearce says:

    @KM:

    The fact that Trump’s trying this at all means the current strategy of not giving baby his bottle and letting public pressure get to the GOP is working just fine.

    “The strategy is working just fine” and “Trump owns this horrible shutdown that’s hurting so many people” are two incompatible ideas and can only be reconciled by disbelieving one or the other.

    Surely, you’re willing to be evicted and default on your debts and spend your way through your savings so “baby doesn’t get his bottle,” but I’m not. Give the baby his bottle and let the grown-ups have some damn peace.

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  10. Jen says:

    Almost every article I’ve read about this focuses on the 800,000 federal workers who have been furloughed and will receive back pay when this is over. What I have not yet seen much coverage of are all of the federal contractors who are NOT guaranteed back pay. I have two friends who fall into this category, and contrary to what I think is the general impression, these are not well-heeled defense contractor employees. One is already in a very tight situation, and this is not helping.

    The real ramifications of this shutdown are still to come, and it’s going to look like falling off a cliff, especially if these contractors don’t receive back pay.

  11. Jen says:

    OT: It appears as though Speaker Pelosi has rescinded the invite for Trump to speak at the State of the Union address, citing security concerns amidst the shutdown.

  12. KM says:

    @James Pearce:

    Give the baby his bottle and let the grown-ups have some damn peace.

    Don’t deal with kids much, do you? If you keep giving into tantrums, they never stop. You’ve essentially validated the idea that acting up and being disruptive gets you rewarded so why stop, why give the adults peace when you can scream your lungs out and they’ll give you what you want to stop? “The kid is having a tantrum” and “the strategy of ignoring their screaming ass is working” are not mutually incompatible once you realize tantrums can’t last forever but they will be re-occurring. You can only scream till you’re hoarse for so long but once that voice recovers…..

    Every parent has had to do the whole “let them cry themselves to sleep thing” at some point or another. It’s hard, it’s stressful. You want it to stop but unless you ride it out, it’s not going to stop, just move to another night. Temporary pain for long term gain. The tantrum’s starting to putter out – Trump’s getting that he’s causing problems for people that actually matter to his schemes. The GOP is already breaking ranks as the problems mount. Why do you keep pushing knuckling under to hostage demands when the hostage taker is losing control of the situation?

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  13. charon says:

    @Jen:

    Here is a linky with an image of the Speaker’s letter to Trump:

    https://twitter.com/nycsouthpaw/status/1085546417425403904

    Despite what the headlines say, Pelosi is not asking.

    “What Pelosi does in this letter is rescind Trump’s invitation to speak in the House chamber during the shutdown and then suggest some alternatives he could pursue. Framing it as “asking” for a postponement is misleading because it wrongly implies Trump has power to say yes or no.”

  14. Joe says:

    He can order workers back to work, but they will eventually have to quit for paying jobs. People living paycheck-to-paycheck cannot do this indefinitely. Those TSA folks getting you through the airport lines probably do not have rainy day funds.

  15. James Pearce says:

    @KM:

    Don’t deal with kids much, do you? If you keep giving into tantrums, they never stop.

    I now realize the error of buying into the metaphor in the first place…. Trump isn’t actually a baby and Nancy Pelosi and Chuck Schumer aren’t actually the responsible parents.

    Also, the reason that the shutdown is now in it’s, what, 26th day is because “both sides” believe it the end result will be “Temporary pain for long term gain.”

    What if the “pain” won’t be so temporary and no one gains anything? Will it have been worth it after all?

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  16. Teve says:

    a legislative fix that includes the following: 1. Impounding the salaries of Congress

    any other impossibilities you desire?

  17. Jen says:

    @charon: Yep! That’s why I was careful how I worded my statement. A lot of coverage is saying “asked” but I read the letter closely. The real cherry on top is her referencing Secretary Nielsen’s classification of the SOTU as a national “special security event.” I bet they didn’t think that one through.

    @Joe: Many Americans don’t have rainy day funds–federal workers or not (which is why I think the contractor aspect is critical). An opinion piece in the NYT today by some economists shows how quickly some are going to hit a wall.

    This is going to start causing some real hardships, very soon.

  18. James Pearce says:

    @Jen:

    An opinion piece in the NYT today by some economists shows how quickly some are going to hit a wall.

    Small price to pay, huh?

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  19. gVOR08 says:

    @charon: Thank you. Depriving Trumpy Baby of TV time. That’s gonna leave a mark.

  20. HelloWorld! says:

    @Jen: During the last shutdown all the federal contractors got paid. I am not a conservative, but I actually have a problem with that, and with the fact that federal contractors in the IT area are hugely overpaid, but that’s a different topic.

  21. wr says:

    @James Pearce: ” Give the baby his bottle and let the grown-ups have some damn peace.”

    Pretty sure you’re not a parent, so maybe you fail to understand that the reason you don’t give the baby his bottle every time he screams is because that teaches him to throw a tantrum every time he wants something.

    Pretty sure that even you can figure out why that’s a bad idea.

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  22. Jen says:

    @HelloWorld!: IT is completely different.

    My point was, we have offloaded so much work that used to be government work to contractors that it’s no longer just high-end, specialist jobs (like IT, or defense contracting). The janitors who clean buildings, food service, and so on–that’s now all outsourced, and those are NOT highly-paid workers. That’s the situation that one friend is in. If we’re going to transfer all of this work to the private sector, with their worse-than-government benefits and pay, to further hurt those people by not paying them at all for a month…that’s really unethical.

    I suppose we could go back and forth about how a private company shouldn’t put so many of their proverbial eggs in a single basket, but this is the environment that has been created. Shrinking government has been the mantra for a long time, but it’s sort of a shell game.

  23. Kathy says:

    In theory Dennison cannot resort to a shut down every time he done’st get his way, because the continuing resolutions keeping the government funded don’t expire all the time.

    In practice, he can time his demands to coincide with such expirations and effect a shut down then.

    Practice > Theory.

    Therefore it behooves the Democrats not to give in. Compromise, yes, if something is offered in return. Thus far, from all I’ve read, Dennison is offering nothing beyond restoring the full working of the government, as though that was a Democrat-specific thing, or as though it’s not his responsibility to insure the good working of the government.

    “Give me what I want in exchange for status quo ante” is not a negotiating position. It’s an attempt to impose conditions on the normal working of government. It’s an authoritarian move, intended to signal that El Cheeto gets what he wants, and the House doesn’t count, as if the midterm elections never happened.

    Politically the Democrats can sustain their refusal until a majority of the people start blaming them. This is harsh, in view of the damage caused to nearly a million federal workers, but giving in might be worse.

  24. Franklin says:

    Vice President Mike Pence previously played down the shutdown’s effects amid a “roaring” economy

    I guess bears do roar.

  25. HelloWorld! says:

    @Jen: I agree with you here.

  26. James Pearce says:

    @wr:

    Pretty sure you’re not a parent,

    Well, I am definitely not your parent…

    (Don’t even start, dude.)

    @Kathy:

    Politically the Democrats can sustain their refusal until a majority of the people start blaming them. This is harsh, in view of the damage caused to nearly a million federal workers, but giving in might be worse.

    A very illuminating comment. Damage to nearly a million federal workers is okay, as long as you don’t get the blame.

  27. charon says:

    @James Pearce:

    A very illuminating comment. Damage to nearly a million federal workers is okay, as long as you don’t get the blame.

    The core initiating premise here is the same as in any hostage taking for ransom – that only the people of whom ransom is demanded care about the hostages, not the hostage taker ransom demanders. In this context, Trump and McConnell are assumed OK with hostage hurting.

    This can not be allowed to stand, Trump and McConnell need to take responsibility.

  28. charon says:

    @Kathy:

    “Give me what I want in exchange for status quo ante” is not a negotiating position.

    Trump’s abnormal psychology needs “I win, you lose”, he just does not care to participate in win-win negotiating – plus he, and other people (e.g., Pat Buchanan and his ilk) think we win, you lose is a political necessity.

    There is not much Democratic support for we lose, you win, obviously.

  29. James Pearce says:

    @charon:

    In this context, Trump and McConnell are assumed OK with hostage hurting.

    Trump and McConnell agree with Chuck and Nancy that whatever awfulness results from the shutdown will be worth it because…maybe they’ll win.

    It’s universally disgusting.

  30. Kathy says:

    @charon:

    From there it’s a short step to “I lose but you lose worse.”

  31. Gustopher says:

    @James Pearce:

    Also, the reason that the shutdown is now in it’s, what, 26th day is because “both sides” believe it the end result will be “Temporary pain for long term gain.”

    What if the “pain” won’t be so temporary and no one gains anything? Will it have been worth it after all?

    Democrats were elected, in a wave, in part to reign in Donald Trump. Up until now, he has had no oversight, and no requirements to compromise and try to be President for All Americans rather than his base.

    That is what this shutdown ultimately is about. That and Donald Trump taking his marching orders from Ann Coulter.

  32. SC_Birdflyte says:

    @Doug Mataconis: I’m aware of what the 27th Amendment says (in my opinion, it’s one of the stupider constitutional amendments), but the pay of said personnel isn’t “varying”; it’s being held up for further required action. Alas, things that we could routinely count on to get done don’t get done nowadays. Why should our solons put their noses to the grindstone and solve these problems when it’s so easy to get media attention for some grand stunt?

  33. SC_Birdflyte says:

    @Teve: Yes. I want the constitution to guarantee my right to eat ice cream at every meal without ever gaining weight. 🙂

  34. KM says:

    @James Pearce:

    What if the “pain” won’t be so temporary and no one gains anything? Will it have been worth it after all?

    Why are you asking us this question? We’re not the ones screaming for Wall. We’re not the ones cause this problem. All Dems are asking for is the deal as it was – the one that was agreed to and voted on.

    Not one single conservative or concern troll like yourself can explain why Dems have to the ones to give up anything when they’re not the ones making last minute demands and breaking an agreement. Seriously, explain why Trump gets to show up after everything is all said and done and be like “Nope, I want this and you better give it to me or else.” Y’all keep saying “compromise” but what you really mean is “give Trump everything he wants with zero reciprocal *anything*” – he’s not offering anything, he’s not talking about giving anything up, just 11th hour demands that you seem to think must be catered to because he’s destroying things in his tantrum.

    In any other negotiation situation, *nobody* would have trouble identity Trump as the bad faith actor. Nobody would recommend acceding to his whims. Why is it so difficult for you to understand that the longer this goes on, the more people are getting Trump’s terrible at this and are demanding the GOP cave?

  35. gVOR08 says:

    @KM: Our James P is the incarnation of the fallacy known as Murc’s Law.

    Murc’s law, for the uninitiated, is the widespread assumption that only Democrats have any agency or causal influence over American politics.

    In Pearce’s own weird way, it’s a compliment to Dems, basically acknowledging that they’re the adults in the room.

  36. charon says:

    @gVOR08:

    A piece at the Post makes the same point:

    https://www.washingtonpost.com/opinions/2019/01/16/pelosi-is-right-say-no-trumps-speech-because-things-arent-normal/?utm_term=.a96b1a016c87

    The entire Republican strategy is based on the assumption that because Democrats actually care about whether government operates properly, they’ll be quicker to give in, and because Republicans don’t care, they can hold out for longer.

    Why should Pelosi help Republicans communicate to the public that this is normal or acceptable?

  37. James Pearce says:

    @Gustopher:

    Democrats were elected, in a wave, in part to reign in Donald Trump.

    Dems were elected to control the House and that’s it. Did they promise the longest shutdown in American history? Of course not.

    @KM:

    Seriously, explain why Trump gets to show up after everything is all said and done and be like “Nope, I want this and you better give it to me or else.”

    He’s the president, with the Senate in his pocket, and a 41 seat advantage in the House isn’t enough to break through that.

  38. Gustopher says:

    @James Pearce:

    He’s the president, with the Senate in his pocket, and a 41 seat advantage in the House isn’t enough to break through that.

    So you want to boil it down to power? He can’t get a lot of shit done without the consent of congress. And the House ain’t consenting.

    He’s going to have to learn to be a big boy, and work with people. Maybe govern for All Americans, not just his base. Put a deal on the table that the Democrats can live with, and live up to it.

  39. Kathy says:

    Arguing with Pearce is like arguing with a flat-earther. No matter how good your arguments or how strong your evidence, at best he’ll move the goal posts, at worst he’ll keep insisting the Earth is flat but won’t reply to your arguments or evidence.

    Let him keep believing he’s against Trump. We know better.

  40. Mister Bluster says:

    HelloWorld! sez:
    I think the Dems should give them a bill that includes money for a wall, but only after it goes to a special election so the country can vote on if we think a wall should be in the future of the United States or not.

    Which Article or Amendment of The United States Constitution allows for this “special election”?

  41. flat earth luddite says:

    Remember, everyone, it’s not important to the people in power if the little people are starving, or living in the streets because they’ve been evicted for not paying their rent because they haven’t been paid. And it doesn’t matter that we force them to work without paying them. At least, it’s not important until they start finding rope… and lampposts.

  42. An Interested Party says:

    It’s an authoritarian move, intended to signal that El Cheeto gets what he wants, and the House doesn’t count, as if the midterm elections never happened.

    Republicans are quite familiar with ignoring election results…look how they’ve tried to preemptively strip powers from incoming Democratic governors in Wisconsin, Michigan, and North Carolina…Trump is the perfect person to be the head of a political party full of sore losers…

  43. James Pearce says:

    @Gustopher:

    He’s going to have to learn to be a big boy, and work with people. Maybe govern for All Americans, not just his base. Put a deal on the table that the Democrats can live with, and live up to it.

    We’re talking about Donald Trump still, right?

    @Kathy:

    Let him keep believing he’s against Trump.

    It’s not about being “against Trump.” It’s about being against the rancid stupidity that led to Trump.