While Congress continues to deliberate over potential U.S. tax reform, a full slate of legislative items await, and looming over all is the Dec. 8 deadline to extend funding for government agencies. As the U.S. economy begins to show signs of life and shake off the doldrums of a slow recovery, and Americans hit the mall to get their holiday spirit on as they await the much anticipated tax reform (or cut), the timing could not be worse. In particular, if a shutdown were to take place so far into the quarter, fourth-quarter GDP would not have time to bounce back, which could shake investors and consumers and, as a result, possibly snuff out any economic momentum.
S&P Global's U.S. economics team continues to see the likelihood of a December shutdown as slim, particularly given the timing and other factors in play. However, betting the holiday budget on a rational U.S. government may be a risky proposition that leaves the cupboards bare to start 2018.
With that in mind, assuming the government crosses that line, S&P Global economists estimate that a shutdown could shave approximately 0.2 percentage points, or $6.5 billion, off of real fourth-quarter GDP growth for each week it drags on. Given the shutdown would begin later in the fourth quarter, the hit to quarterly GDP growth may be even larger because there would be little to no time to regain the initial losses once government facilities are back in operation. Along with this, economic activity, including lost productivity from furloughed government employees, would not be recovered. Not the way you want to ring in the holiday season and the New Year.
The possibility of a shutdown seems highly unlikely given the administration is Republican and the GOP holds majorities in both the House and the Senate (albeit, a slim one), and with both midterm elections and a much-needed legislative victory on the horizon. However, recent indications by President Trump that he intends to press his immigration reform agenda as part of the negotiations and his social media comment that Democratic lawmakers' unwillingness to go along with this means "No Deal!," the unthinkable has suddenly wandered into the realm of what may come to pass.
The dim shutdown scenario pales in comparison to a debt ceiling impasse. Congress suspended the limit through Dec. 8, 2017. However, the debt limit will be reset on Dec. 9, and the Treasury Department will then have to begin taking its usual "extraordinary measures." Unless the debt ceiling is raised, the government will run out of money next spring, according to the Congressional Budget Office. Were this to happen, the seemingly even more implausible scenario of the Treasury being left with insufficient funds to meet it financial obligations would be a catastrophic one, albeit man-made.
Our analysis is, in part, based on the experience of the back-to-back shutdowns of almost four weeks that happened during the Clinton Administration in 1995-1996 and the more recent 16-day shutdown during the Obama Administration in October 2013. While the Bureau of Economic Analysis (BEA) said that the full effects of the partial October 2013 shutdown can't be quantified, it estimated that the direct effect from lost hours worked by federal employees reduced fourth-quarter GDP by 0.3 percentage points. (The BEA earlier estimated that one-third of the 11.9% decline in federal spending and investment in the fourth-quarter 1995 GDP report was due to the shutdowns of the federal government in mid-November and late December.)
The Butterfly Effect
The BEA estimated only the direct impact of the shutdown. But, since the government touches almost every aspect of the economy, the full effect of a shutdown would likely be much larger. A disruption in government spending means no government paychecks to spend; lost business and revenue to private contractors; lost sales at retail shops, particularly those that circle now-closed national parks; and less tax revenue for Uncle Sam. That means less economic activity and fewer jobs. We expect something in line with the Council of Economic Advisors (CEA), which earlier estimated that 120,000 fewer private-sector jobs were created during the first two weeks of the 2013 shutdown. A December shutdown, if it were to happen, coincides with the holiday season. No paychecks to cash during furlough will make for a very humbug holiday.
Ironically, a possible shutdown will add to the budget deficit because it's costly to stop and start programs. Based on the total cost of furloughed federal workers, the 16-day shutdown in 2013 cost the U.S. government at least $2 billion, according to the Office of Management and Budget (OMB), while the two 1995-1996 shutdowns cost the U.S. government $1.4 billion ($2.2 billion in today's dollar). Given the deficit hawks are circling tax reform with an eye on the potential impact, this would be a far from ideal outcome, particularly if tax changes come through at a razor-thin margin.
A shutdown will initially slow GDP because the output lost when hundreds of thousands of government workers are furloughed subtracts directly from GDP. And, with each day the shutdown drags on, federal workers may start to pull back on household spending at restaurants, childcare, or retail stores because of worries that they won't get paid anytime soon. That's almost 1 million people who won't be getting regular paychecks.
Yet the economic impact of the shutdown goes beyond the federal workforce.
Private contractors who depend on government sales will lose business. During the 2013 shutdown, according to a National Association of Government Contractors survey, 29% of members said that, as a result of the stalemate, they planned to delay hiring. Fifty-eight percent said it would have a negative effect on their businesses. As contractors delay projects, reverberations will be felt throughout the spending chain. This will likely have a ripple effect that spreads through to the economy more broadly.
Holiday vacations and school trips may be curtailed when hundreds of national parks and monuments are closed for business. (Even the Panda Cam at the Smithsonian will be under lock and key.) And with the risk of fewer paychecks, some may rethink whether it's practical to travel home for the holidays. With national parks spread across the U.S., closing these sites does not just mean lost ticket sales. Many regional economies depend almost entirely on visitors to nearby national parks. Those visitors eat at their restaurants, stay at their hotels, and shop at local businesses. That creates jobs, which may no longer be needed if a shutdown drags on.
The End of Days
Businesses don't want to invest during periods of uncertainty, and households will likely delay spending. We saw huge effects during the U.S. debt ceiling crisis in the summer of 2011, with consumer confidence hitting a 31-year low in August, and third-quarter annualized real GDP growing just 0.8%. Given that this round of debt-ceiling negotiations will happen amid government shutdown threats, the hit to the economy could be even more severe.
This all is a prelude to the Treasury Department's hitting the debt ceiling on Dec. 15, 2017, one week after the expiration of the bipartisan spending agreement to fund government agencies. With markets somewhat jittery about a possible selective default of the U.S. sovereign, worries of a shutdown threat only add to their concerns. The shutdown and the looming debt ceiling combined could significantly hurt business and consumer sentiment, as well as the overall economy. Government disarray may dim the afterglow that GOP lawmakers hope to bask in following the likely approval of a compressive tax plan, or even our expectation for a modest tax cut.
While we believe the Senate will pass its deal to raise the debt ceiling, the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.
Should a default occur, the resulting sudden, unplanned contraction of current spending could see government spending cut by about 4% of annualized GDP. The economy would fall back into a recession, wiping out much of the progress made by the recovery.
Finally, the economists at the Federal Reserve, whose monetary policy is now "data-driven," will no longer have government economic reports, such as the Bureau of Labor Statistics' jobs figures, that they need to understand what's going on in the U.S. economy. The length of time that the central bank is without data could muddle the Fed's decision that the economic recovery has made enough progress to begin tapering in October. And with the risk of a government shutdown as we head toward the debt ceiling increasing, the Fed will be more cautious. While we still expect the Fed to continue with its plans to gradually unwind its balance sheet and raise interest rates in December, next year's interest plans may have just become a bit cloudier. In turn, the economists at S&P Global, like those from across a multitude of sectors, may be forced to reexamine our forecast for the U.S. and the prospects for potential long-term economic growth.
According to the OMB, the last three government shutdowns already cost the federal government over $4.25 billion, when we adjust for inflation. These numbers don't begin to account for lost federal worker productivity and lost trust in the federal government, not to mention lost economic activity (and lost taxes) on money never spent by businesses and households while the government is closed. While we at S&P Global continue to see the likelihood of a shutdown in December as slim, the risks are increasing, with the costs high.