North America January 16, 2019 / 07:24 pm UTC

U.S. Shutdown: Longer We Go, Slower We Grow

By David Sloan

Bottom line: Should the U.S. government shutdown persist through Q1, a near-flat quarter for GDP growth could result. It seems unlikely that the standoff will persist for that long, but the path to a resolution remains unclear.

Figure 1: Q1 GDP Growth Estimate, Showing the Effect of Extended Shutdown (Seasonally-Adjusted Annual Rate)

Source: Counsel of Economic Advisors, Continuum Economics

Estimates of the economic damage from the government shutdown are picking up, with U.S. President Donald Trump’s administration estimating a cut of 0.13% from quarterly GDP for each week of the shutdown. In fact, the costs will escalate as increasing numbers of furloughed workers run out of savings, while at the start of the shutdown, in a normally quiet holiday period, the damage would have been minimal.

If the shutdown lasts through Q1, it could take 2.0% or more off of quarterly growth, meaning growth could be close to zero, given our pre-shutdown of 2.4%. We are reluctant to trim our call much at this point, since if the shutdown is resolved by the end of January, the lost output will likely be mostly recovered by the end of the quarter. However, the downside risks are clear. It should also be noted that Q1 has a historic tendency to come in on the low side of trend, though a weak Q1 usually requires a significant bout of unusually harsh weather.

Air travel is one factor that could escalate the downside risk to GDP. The numbers of airport security staff not turning up for (currently unpaid) work is increasing. Presently, this has simply meant longer lines and a few airports trimming the number of operating terminals, but the problems could escalate to cause significant disruptions to travel. If this happens, the pressure on the government to make a deal would pick up significantly.

It is difficult to predict when the shutdown will end other than to say there is very little sign of either side backing down as of right now. Once any positive signs emerge, however, things could move quite quickly. Possible ways out include: 

  • Trump declaring an emergency and pushing the issue to the courts;
  • Congressional Republicans putting pressure on Trump to compromise; or 
  • Democrats getting something, most likely action on the immigration policy known as “DACA” (granting legal rights to those brought to the U.S. as children), in return for agreeing to a “wall”. 

Currently, public opinion is not putting pressure on Democrats to compromise, while Trump’s base is demanding that he refuse to back down.

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Analyst Certification
I, David Sloan, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.