The Shutdown Begins To Weigh On The Economic Outlook

Will the US government’s stalemate over budget negotiations trigger a recession? In “normal” times this question would be dismissed as absurd. But the times they are a changin’.

The good news is that the latest numbers still indicate that the US macro trend remains positive. As The Capital Spectator reported yesterday, for example, a set of nowcasts point to a moderate growth rate for the fourth-quarter GDP report that’s scheduled for release at the end of this month. But as new estimates of the partial government shutdown’s economic costs remind, the potential for trouble is rising.

The White House Council of Economic Advisers, for example, yesterday raised its estimate of economic damage from the shutdown. The New York Times reports that the Council’s chairman, Kevin Hassett, advised 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.)

It doesn’t take a Ph.D. in economics to realize that the constant chipping away at growth will eventually lead to economic contraction since there’s a finite amount of positive output that can be shaved before GDP change turns negative. Thus the crucial question: When will the shutdown end? At the moment, it’s a guessing game, although the latest headlines imply that the end game isn’t near.

It doesn’t help that going into the shutdown US economic growth was already slowing. Most estimates for the Q4 GDP report that’s due on Jan. 30 expect a second straight quarter of deceleration. The Wall Street Journal reports an average 2.6% projection via its survey of economists this month – down from 3.5% in Q3 and the red-hot 4.2% rise in Q2.

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