The government shutdown is delaying economic reports, but the latest numbers available continue to indicate a solid increase in the upcoming third-quarter GDP report, based on the median estimate for a set of nowcasts compiled by CapitalSpectator.com. The longer the shutdown lasts, however, the greater the uncertainty as the nowcast inputs age and fail to reflect the latest economic changes.

The Bureau of Economic Analysis (BEA) is scheduled to report its initial estimate of Q3 GDP on October 30–assuming the agency is open. At the moment, BEA is closed due to the government shutdown.

Meanwhile, our median nowcast for Q3 is a solid +2.4%, based on the latest data available. Although that’s down sharply from Q2’s sizzling +3.8%, the current estimate suggests that economic activity was moderately strong during the July-through-September period. Recession risk, in other words, remained low in the previous quarter.
 

Warning signs for Q4, however, are emerging. Analysis by Moody’s Analytics, for example, advises that a third of US state economies are contracting and another 13 are “treading water.” Two of the states with the biggest influence on US GDP — California and New York — appear to be at the tipping point. “Those two states are treading water. They’re big states, and if they go into the red then that’ll probably take the national economy with them into recession,” predicts Moody’s chief economist, Mark Zandi.

Survey data for September indicates that growth downshifted, but remains moderately positive, based on the S&P US Composite PMI, a GDP proxy. The consultancy reports: “Employment meanwhile barely rose, but confidence in the outlook strengthened noticeably. Cost pressures remained elevated, although inflation softened to a five-month low. A similar trend was seen for output charges.”

The longer the shutdown lasts, the bigger the hit for the economy. A rule of thumb from economists is that for every week that the government stays closed, GDP is reduced by 0.1 to 0.2 percentage points.

The government shutdown more than a week ago (Oct. 1), and at the moment a political solution still looks elusive. A pair of funding bills to reopen the government were voted down on Thursday in the Senate. Meanwhile, lawmakers showed no sign that they are prepared to back down from their respective party’s positions on funding the government.

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