Shutdown Now Costs $1 BIlion Per Day, And Consumer Sentiment Is Starting To Slide

The partial government shutdown is in its 34th day and counting, and it is starting to have a significant effect on the economy.

According to Brian Rose, senior economist at UBS Global Wealth Management, the closure is now costing the economy about $1 billion a day, and if Q1 growth is zero or negative as a result - as administration officials admitted may happen earlier this week - it likely won't see a sharp rebound in Q2 even if the shutdown ends, for reasons including that it may be tough to replace workers who quit; as a result one should think about that famous hockey-stick graph when projecting the pace of the growth hit from the shutdown according to UBS.

This is what Rose said in terms of calculating the direct impact of the shutdown:

The direct impact from the shutdown-the loss in real government expenditures-is purely mechanical: calculate the loss in aggregate hours worked and you get about a 0.1pp drag to growth every two weeks the government remains shuttered. The indirect impact-how consumers and businesses respond-is harder to quantify. Part of that story will be how consumer sentiment evolves over time to various news flow such as moves in equity markets and updates from DC and how that translates to changes (if any) to demand.

Yet while the direct impact from the shutdown - the loss in real government expenditures - is purely mechanical, which one can calculate simply in terms of the loss in aggregate hours worked (getting about a 0.1% drag to growth every week the government remains shuttered), and which prompted JPMorgan to once again cut its Q1 GDP forecast from 2.0% to 1.75% moments ago (and down from 2.5% two weeks ago), the indirect impact - how consumers and businesses respond - is harder to quantify, but according to Bank of America is becoming a key concern.

As BofA economist Joseph Song writes in a Thursday note, part of that story will be how consumer sentiment evolves over time to various news flow such as moves in equity markets and updates from DC and how that translates to changes (if any) to demand.

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