The partial government shutdown was supposed to be a brief non-event for the economy. Now it’s starting to look like a serious crisis that could nudge the U.S. toward recession and threaten President Donald Trump’s economic message during his reelection campaign.
Across Wall Street, analysts are rushing out warnings that missed federal paychecks, dormant government contractors and shelved corporate stock offerings could push first-quarter growth close to or even below zero if the shutdown, which is wrapping up its fourth week, drags on much longer.
Their broader fear: The protracted impasse could convince consumers and businesses that the federal government will spend all of 2019 on the brink of crisis — whether on the border wall, trade with China or the debt limit. That could choke business investment and consumer spending, bringing an end to one of the longest economic expansions on record.
Recessions don’t just happen, after all. They are usually triggered by largely unforeseen shocks to the system, like the tech over-investment and dot-com crash of the late 1990s or the credit crisis of 2008. The government shutdown is not there yet. But the longer it drags on, the closer it gets.
“You can take the ruler out right now and calculate the exact impact from missed paychecks and contracts and you don’t have to go many months to get to zero growth,” said Torsten Slok, chief international economist at Deutsche Bank. “But this is not just some linear event. It can get exponentially worse in very unpredictable ways, from government workers quitting, to strikes, to companies not going public. It’s no longer just a political sideshow, it’s a real recession risk.”
Part of the reason for the increased alarm is that economists and Wall Street forecasters were already worried about the direction of the economy in 2019 as stimulus from the big tax-cut bill fades, growth slows outside the U.S. and Trump’s trade battles send shock waves through the stock market. Consensus estimates for growth this year were already down to under 3 percent before the shutdown.
Now some are slashing their estimates even further. Ian Shepherdson of Pantheon Macroeconomics this week said if the shutdown lasts through March it could push first-quarter growth below zero, a sentiment echoed by J.P. Morgan Chase CEO Jamie Dimon on the bank’s earnings call on Tuesday in which he implored Trump and Congress to make a deal.
The White House itself, through the Council of Economic Advisers, said this week that the shutdown impact would be roughly double what it originally anticipated. That could push first-quarter growth below 2 percent.
That’s a number Trump, who promised sustained growth over 3 percent, will not like. And while the president and congressional Republicans are trying to blame Democrats’ intransigence on border wall funding, polls show voters overwhelmingly blame Trump and the GOP.
And incumbent presidents almost always take the blame if the economy goes sour on their watch.
“Herbert Hoover said, ‘The president takes the credit for the sunshine and blame for the rain,’ and he should know,’” said Allan Lichtman, a political historian at American University. “One of the keys that always counts against the sitting president or the party of the sitting is an election-year recession. And in fact no president or their party has ever been re-elected in the midst of an election-year recession.”
The White House for the moment is counting on the shutdown only having a limited and short-term impact. If the government were to reopen soon — before another round of missed federal paychecks next week, for instance — then much of the lost growth could be restored. Trump on Wednesday signed legislation ensuring swift back pay for those who missed paychecks last week.
Some spending that would have happened without a shutdown will never come back. Credit damage to those who missed payments or took out high-interest loans to cover expenses will not be quickly repaired. But if it ends soon, the shutdown is not likely to be the kind of shock that pushes the U.S. toward the next recession.
The risk could rise significantly if the shutdown continues to drag on, directly impacting paychecks and spending and making businesses and consumers more concerned about the March 1 deadline to make a trade deal with China and a summer deadline to raise the nation’s borrowing limit.
In that sense, it would not be the shutdown alone that constitutes the shock to the system. Instead it would be the shutdown instilling in Americans a feeling that the government simply cannot function as currently constructed.
“One thing that we worry about is what is going to break consumer confidence, what is going to shake consumers and shake business confidence, what is going to make people worried enough that maybe they pull back a little bit,” Betsey Stevenson, a member of the Council of Economic Advisers under President Barack Obama now at the University of Michigan, said on the POLITICO Money podcast this week. “And that’s why a lot of people are a bit worried that the government shutdown could have long-lasting negative effects if it goes on long enough that it shakes both consumer and business confidence.”
The shutdown itself is limiting the amount of economic data available.
The Commerce Department on Wednesday, for instance, did not release a report on December retail sales due to the lapse in funding. A report on gross domestic product for 2018 scheduled to be released Jan. 30 will not come out if the shutdown is still in effect.
But data that are coming out are increasingly troubling. A private-sector reading on manufacturing activity in the New York region on Tuesday fell to its lowest level in over a year. That followed a reading on manufacturing nationally that fell in December to its lowest level since November 2016, suggesting the shutdown began as the economy was already losing some traction. A key reading on small-business owners’ confidence fell for a fourth straight month in December with respondents citing in part the fractured political climate.
So far, Wall Street has mostly shrugged off both the shutdown and recession warnings, preferring to focus instead on still-solid corporate earnings and signals from the Federal Reserve that it could respond to economic weakness in 2019 by stopping its plans for future rate hikes.
People close to the president say he tends to gauge economic risks by market reaction, so the lack of any big drops on Wall Street could be among the reasons he does not yet feel significant pressure to change his wall demands in ways that could end the shutdown.
A significant shutdown-related selloff on Wall Street could be one of the few things that might shift Trump’s thinking, much as it did on trade with China — pushing the president toward seeking a deal rather than engaging in bruising rhetorical attacks.
In the meantime, visible evidence of shutdown impacts from trash-strewn national parks, to longer lines at airports due to unpaid TSA agents not showing up, have not moved the president.
Less visible impacts, like a shuttered Securities and Exchange Commission being unable to move on potential big IPOs like those planned for Uber and Lyft, are also not yet changing the political conversation. These delays — like those for small businesses unable to get necessary approvals from government agencies — likely won’t show up in economic data for several months. But they are already subtracting from growth.
And concern is growing that the consensus view — that the economy is basically fine despite the Washington sideshow — could wind up being wrong.
“Markets are hanging onto the view that the economic data are just fine, there’s just something going on with politics that’s got nothing to do with the economy,” said Slok.
“Now we have policy choices being made because of the gridlock in Washington and the shutdown and the trade war that are having real consequences,” he said. “That can no longer be ignored.”
Article originally published on POLITICO Magazine
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