- The US government has been in partial shutdown since December 22.
- Key US economic data will either be delayed or be distorted by the shutdown the longer it lasts, creating uncertainty over what is actually happening in the economy.
- BAML’s US economics team estimates that for every week the shutdown lasts it will reduce GDP growth by 0.1-0.2 percentage points.
The US government has been in partial shutdown since December 22 as Republicans and Democrats quarrel over funding for Trump’s southern border wall.
To date, there are few signs the deadlock will end anytime soon, putting the shutdown on track to become the longest on record, should it move beyond January 12.
As Bank of America Merrill Lynch’s (BAML) US economics team note, not only does the shutdown pose a risk of slowing the economy down the longer it runs, but it will also create increased uncertainty over what exactly is going on within the economy.
Here’s a snippet from the bank explaining why:
The shutdown will lead to further delays in economic data releases from the Census Bureau and Bureau of Economic Analysis. This means key data points on the US economy, such as retail sales and GDP, won’t be released in a timely manner. In addition, employment data, such as the weekly initial claims and the monthly employment situation report, will most likely be distorted due to the shutdown, leading to further complications in assessing the state of the economy. This suggests it may take some time to get a “clean” read on the economy, raising the uncertainty around a March Fed hike.
Put bluntly, a prolonged shutdown will mean the US Fed and markets will be essentially flying blind when it comes to economic signals. That’s not a great outcome for the world’s largest economy, increasing the risk of a policy mistake or substantial miss-pricing by financial markets.
Along with generating increased uncertainty, BAML says the shutdown will almost certainly drag on economic growth both in the final quarter of last year and again in early 2019. The only real question is how long will the shutdown will last and, as a consequence, how large the impact on the economy will be.
The general rule of thumb is the direct impact of a full government shutdown is roughly a 0.1-0.2 percentage point (ppt) drag on growth per week. Therefore, we’ve revised down Q4 GDP tracking by 0.1ppt to 2.8% while Q1 GDP remains vulnerable to a forecast reduction as the shutdown drags on.
In addition to the direct drag to government consumption, we could see indirect effects from a temporary slowdown in consumption due to weaker spending from furloughed workers and delay in business investments from policy uncertainty. Further drag could come at the margin if a sustained shutdown leads to a decline in business and consumer sentiment and/or a decline in US equity markets. If the shutdown continues into March, funding lapses for food stamps could materially impact personal consumption and the cumulative drag from the shutdown could meaningfully cut growth in Q1, although some of it would be made up once the government reopens and back pay is released.
For the moment financial markets have taken the shutdown in their stride. However, if it last months or years as Trump has warned, that’s unlikely to remain the case for long.
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