The government shutdown could cause the US economy to shrink, Credit Suisse warns

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  • Economists have lowered GDP growth forecasts since the partial government shutdown began.
  • About 800,000 government workers are bracing for a second missed paycheck this week.
  • As the impasse continues into its fifth week, some see an economic contraction as a possibility.

After about a quarter of the government was shut down in December, economists began to dim their outlooks for business activity in the US. But as the longest shutdown on record continues into its fifth week, some are considering the possibility of economic growth turning negative.

About 800,000 government workers were bracing for another missed paycheck this week as lawmakers and the president remained in gridlock over border security on Tuesday, a disruption that’s expected to have widespread consequences for the economy. While not their base case, Credit Suisse analysts said a contraction was possible in the first quarter.

“If the shutdown drags on though, a substantially larger impact is possible,” they wrote in a research note. “The timing of the current shutdown – right before tax return season – raises the stakes significantly. Missed paychecks for government workers will be a drag of several billion dollars. If tax refunds are significantly delayed, the short term economic cost could be in the 10s or even 100s of billions of dollars.”

With looming declines in spending, investment, and savings across the country, economists think first-quarter gross domestic product, the total value of the nation’s goods and services, could fall to well below 2%. Economic growth came in at 2.2% for the same period last year.

Even internal estimates have become increasingly dismal in recent weeks. The White House expects the shutdown to deduct 0.13 percentage points from quarterly GDP each week.

President Donald Trump signed a bill last week that ensures back pay for furloughed employees, but that would not be distributed until after the shutdown ends.

In the meantime, people will dig into savings, skip debt payments and run up their credit card balances in order to maintain essential spending, according to Pantheon Macroeconomics chief economist Ian Sheperdson. He thinks if the impasse lasts through the first quarter, it could bring reported growth to between 0.5% and 0.75% or lower.

“Second-round effects could then bring that number to zero, because creditors and suppliers of businesses hit by the shutdown will become less patient if it drags on,” he said. “Federal employees will receive their back pay, but that doesn’t mean that the businesses they patronize will be made whole by extra spending after the shutdown.”

While others see a first-quarter contraction as less likely, the shutdown has muddled outlooks for an economy already facing uncertainty on multiple fronts. A string of official economic data, including fourth-quarter GDP, are set to be withheld until government agencies like the Commerce Department resume operations.

“Overall a contraction is unlikely, but you also can’t rule it out,” said Moody’s economist Adam Ozimek. “The fact that we are even discussing the possibility of a wholly government created contraction in GDP is enough to really make you scratch your head. The economy is strong, the recovery is still ongoing. This is an entirely unnecessary risk we are manufacturing.”


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