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With Another Government Shutdown, How Big a Bite?

The U.S. may be "open for business," but at midnight on Feb. 8, the federal government could very well be "closed until further notice."

The federal government already partially closed its shops in January for the equivalent of a long weekend for Uncle Sam's helpers.

But while a shutdown, if it's brief, wouldn't be a disaster, it still could add a couple of dents in our nice shiny fender. The good news is that the economy shouldn't suffer a flat tire from a short shutdown and will still be able to run. While that's somewhat reassuring, a shutdown would still reduce some of the economic gains the U.S. receives from the tax package that would start to appear in the first quarter.

S&P Global Ratings Economics estimates the U.S. government shutdown may cost first-quarter growth around $6.5 billion (annualized) or 0.2 percentage points for every week the government is closed.

The impact from a shutdown has both direct and indirect economic costs. Indirect costs include canceled vacations to national parks, museums, and monuments that are closed, or lost business to contractors that do jobs for Uncle Sam, forcing some businesses to reduce staff. This will remove a bit of money from the pockets of private citizens across the U.S. The U.S. could see 2.2 million federal workers (excluding U.S. postal service) without paychecks (in 2013, at least 2 million saw no paychecks while the government was closed). Unsure when they'll get their next paycheck, households may have to cut back on spending while the government is closed.

But those costs may be recouped once the government activity is turned on again. A February shutdown would come early in the quarter. Assuming the shutdown is short, the quarter would have time to recoup some of its economic losses once the government is back in operation.

The direct impact to the economy would be an immediate loss of productivity from furloughed government employees estimated to be deemed "nonessential." We assume the number of people considered "nonessential" is now smaller than in 2013, when the figure of nonessential workers was approximately 850,000, according to the Office of Management and Budget.

For example, the Trump administration deemed employees at some national parks as essential, so a few national parks and national monuments were open in January, unlike their status during the 2013 shutdown. However, visiting Smithsonian museums and watching pandas at the national zoo would have to wait, as federal employees running those institutions didn't make the cut. If government sites are closed, people who had planned a trip there may cancel vacation plans. The government will lose fee revenue, and restaurants and hotels that thrive off visitors to government sites will lose business.

While some indirect costs may be regained once the government reopens, direct costs from the U.S. government closing shop are lost forever. Economic activity from lost productivity from furloughed government employees won't be recovered. While the Bureau of Economic Analysis (BEA) said that the full effects of the partial October 2013 16-day shutdown can't be quantified, they 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.)

As in previous shutdowns, the productivity lost from furloughed government workers will never be regained. In real terms, GDP would be reduced since no "product" was created. However, furloughed government employees do usually get paid (with taxpayer money if Congress decides to compensate them afterwards), so the shutdown would have no effect on nominal GDP and by extension would add to inflation in the first quarter.

Turning the government off and on comes with a cost. Indeed, even the January "weekender" shutdown wasn't without costs. Based on estimates adjusted for inflation, the three earlier government shutdowns (in 1995, 1996 and 2013) cost the federal government a chunk of cash well into the billions. This doesn'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 was closed. Even the January shutdown, which amounted to a long weekend, as everyone returned to work on Tuesday once Congress reached an agreement that Monday, had this effect, even if it could be counted in the millions, not in billions. While we at S&P Global Ratings see the likelihood of a shutdown in February as low, the cost of one is real and could be high the longer the government is closed.

In general, 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%. More recently, ongoing government gridlock may have given people pause as they consider investing and spending.

This all happens after hitting the debt ceiling on Dec. 8, 2017. The Treasury Department has been using "extraordinary measures" to keep the government afloat. On Jan. 30, Treasury Secretary Mnuchin extended the Debt Issuance Suspension Period to Feb. 28, 2017 (previously Jan. 31) in his official notification to Congress. The Congressional Budget Office estimates the government will run out of room to deploy extraordinary measures faster than it initially expected--now likely in mid-March because of lower revenues from the 2017 tax package compared with previous estimates for March or April. The shutdown and the looming debt ceiling combined could significantly hurt business and consumer sentiment, as well as the overall economy.

While we believe Congress 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.

We think Congress will reach a new agreement on funding the government by the Feb. 8 deadline. But, if they don't, first-quarter growth could take a hit. How big a hit depends on how long. And another short continuing-resolution reprieve, which kicks the "shutdown can" down the road a few feet, only brings a possible shutdown fight closer to the debt ceiling debates, complicating what could already be an ugly fight.