The good news is that the engine of growth for the US economy is the private sector. But the government’s share of GDP isn’t trivial, which means that a potential government shutdown that could start at midnight tonight will be a non-trivial event.
How did we get into this mess? The usual path: political dysfunction in Washington. The short version this time: A hastily patched together bill was voted down on Thursday night. House Speaker Mike Johnson, R-La., needs to craft new legislation that will pass sometime today in order to keep the government running. The odds of that happening appear low this morning.
Never say never, but there’s a distinct possibility that the federal government will close starting on Saturday. What does that mean for the economy? The main variable: How long does the government remain shut? No one knows, courtesy of the slippery beast of political forecasting in Washington these days.
Meantime, here are some few basic facts for perspective on what could be a long and winding road ahead. Let’s start with how much influence the federal government casts over the US economy. Federal spending was 6.4% of GDP in the third quarter, according to the US Bureau of Economic of Analysis. Most of that is related to “national defense”, which is about 57% of federal spending, with the balance tied to everything else.
But those are abstract numbers. What’s the real world impact of a government shutdown? Recent history offers a guide. During the five-week 2018-2019 “partial” shutdown, roughly 800,000 federal workers were ““furloughed.”
How did the 2018 shutdown impact the economy? The Congressional Budget Office estimates “that the five-week shutdown delayed approximately $18 billion in federal discretionary spending for compensation and purchases of goods and services and suspended some federal services.”
As a share of quarterly real GDP, the level of real GDP in the fourth quarter of 2018 was reduced by 0.1 percent, CBO estimates. And the level of real GDP in the first quarter of 2019 is expected to be reduced by 0.2 percent…. Underlying those effects on the overall economy are much more significant effects on individual businesses and workers. Among those who experienced the largest and most direct negative effects are federal workers who faced delayed compensation and private-sector entities that lost business. Some of those private-sector entities will never recoup that lost income.
In sum, the economy took a hit. “In CBO’s estimation, the shutdown dampened economic activity mainly because of the loss of furloughed federal workers’ contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which thereby dampened private-sector activity).”
Reviewing GDP data for 2018 suggests that the shutdown effect was conspicuous. Indeed, Q4 GDP growth that year was a weak 0.6% annualized rate – a downside outlier.
If the government does shut down tomorrow, what’s in store re: economic blowback? First, let’s remember that the shutdown will be partial. Departments considered “essential” will stay open – that includes most of the workers at the Transportation Security Administration, for instance. Meanwhile, some government services will continue, such as Social Security payments.
Today, however, is all about political calculus and whether the House can pass a spending bill before the clock strikes 12. House Speaker Johnson tried to put a brave face on the challenge of finding common ground for Republicans and Democrats that’s needed to pass legislation. Commenting on the treacherous path that has been pro forma in Washington budget battles in recent years, he said:
“This is Washington. This is how lawmaking is done. It’s a long process. Sometimes it takes a while for getting consensus,” He added that Republicans “will regroup and we will come up with another solution.”
Anything’s possible, but at the moment it’s fair to say that the odds don’t look encouraging.
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