AIIS says longest government shutdown in US history could threaten to stall the country’s economic momentum

With lawmakers and the Trump administration unable to reach a deal on spending, parts of the government have been shut down since Dec. 22, while others, such as the Transportation Security Administration, have been operating with employees who are not being paid. President Donald Trump has insisted that he will not sign an appropriations bill for the government agencies that have not yet been funded for fiscal year 2019 unless Congress provides $5 billion to build a wall along the border with Mexico.

With 800,000 federal workers not being paid and various second and third-order effects of the shutdown also having a negative economic impact, gross domestic product (GDP) growth in the first quarter could be restrained. This becomes more of a concern the longer the shutdown lasts, and neither Trump nor Democratic lawmakers enjoying their new majority in the House of Representatives have shown any signs of relenting. Trump, in fact, has largely staked his credibility, if not his presidency, on getting funding for the wall, and he has said that the shutdown could last “months or even years.”
It had generally been predicted that the shutdown would reduce growth by from 0.05 to 0.1 percentage points per week, but the White House Council of Economic Advisers in January increased the estimated impact to 0.13 points per week. The New York Times reported that council Chairman Kevin 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.”
While many economists have scaled back their projections of Q1 expansion, at least one sees the potential for negative growth. Ian Shepherdson, chief economist at Pantheon Macroeconomics, warned that, “if the shutdown were to last through the whole quarter, we would look for an outright decline in first quarter GDP.” He further noted that, “The longer it goes on, the longer it takes to recover,” especially since, while federal employees may eventually get back pay, government contractors and others directly or indirectly affected may not be able to recoup what they have lost.
The economy grew at an annualized rate of 3.4 percent in the third quarter, following 4.2 percent in Q2 and 2.2 percent to start 2018, BEA reported. Hopes for a strong finish that would push growth for the year past 3 percent for the first time since 2005 may not be granted, with the shutdown affecting the last 10 days of the year and initial holiday sales reports mixed, as major retailers Macy’s and Kohl’s saw weaker than expected sales.
The Federal Reserve had been expected to increase interest rates at least twice in 2019 to keep the economy from overheating. In January, however, Fed Chairman Jerome Powell – who has been frequently criticized by Trump for the central bank’s seven rate hikes since his January 2017 inauguration – indicated that they may not happen.
“With the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves,” Powell said. “We’re always prepared to shift the stance of policy and to shift it significantly, if necessary.”
At its December meeting, the Fed, noting that “economic activity has been rising at a strong rate,” raised the target range for the federal funds rate a quarter point to 2.25 to 2.5 percent. Consistent with Powell’s January statement, though, the minutes of the December meeting report that, “the Committee judged that a relatively limited amount of additional [monetary] tightening likely would be appropriate [in 2019]. While members judged that the risks to the economic outlook were roughly balanced, they decided that recent developments warranted emphasizing that the Committee would ‘continue to monitor global economic and financial developments and assess their implications for the economic outlook.’”
The economy added 312,000 jobs in December, but the unemployment rate rose to 3.9 percent, according to the Bureau of Labor Statistics.
A leading measure of consumer confidence fell in December, with The Conference Board’s Consumer Confidence Index dipping from 136.4 to 128.1. (The index’s baseline is 100 in 1985.) The Board’s senior director of economic indicators said there is “increasing concern that the pace of economic growth will begin moderating in the first half of 2019.”
The University of Michigan’s Index of Consumer Sentiment, though, increased slightly from 97.5 in November to 98.3 in December. However, researchers noted, “Consumers reported more negative than positive news about job prospects for the first time in two years, with the shift widespread across socioeconomic subgroups” and added that “it has been news of changing job and income prospects that have been of the greatest concern to consumers.”
Confidence in the manufacturing sector decreased significantly, with the Institute for Supply Management’s Purchasing Managers Index falling 5.2 points in December to 54.1, the lowest level of 2018. Of 18 industries surveyed for the index, 11 reported growth. “Comments from the panel reflect continued expanding business strength, but at much lower levels,” the chair of the institute’s Manufacturing Business Survey Committee said.
Housing starts in November increased 3.2 percent from October but were 3.6 percent below the November 2017 level, the Census Bureau and the Department of Housing and Urban Development reported. Existing home sales increased 1.9 percent from October to November, according to the National Association of Realtors, as the association’s chief economist observed “good signs of stabilizing home sales compared to recent months, though down significantly from one year ago. Rising inventory is clearly taming home price appreciation.”
After a dismal December for the stock markets, the Dow Jones Industrial Average and the S&P 500 Index were both negative in 2018, falling by 5.6 percent and 6.2 percent during the year, respectively.
The dollar ended the year trading at 0.87 euros, 0.78 pounds, 109.71 yen and 6.88 yuan.
When the Clemson University football team visited the White House in January to be recognized for winning the NCAA national championship, Trump served them hamburgers from Burger King and McDonald’s and other fast food “because the Democrats refuse to negotiate on border security, [so] much of the residence staff at the White House is furloughed,” an administration spokesman said. It appears, though, despite such charges, that most Americans view the shutdown as a crisis of Trump’s own making. Multiple polls in January found that more than half of Americans say Trump is responsible for the shutdown while around a third blame congressional Democrats. So, as the pressure builds amid daily stories of federal employees struggling to pay bills and an expanding macroeconomic hit, it will likely weigh most heavily on Trump, whose signature campaign promise – build the wall – and primary point of pride – economic and stock market growth – are more and more in opposition to each other. He may be coming to the grudging realization that he can’t have it his way, and he surely is not lovin’ it.