Government shutdown threatens to have bigger impact on economy

“In addition to the direct drag to government consumption, we could see indirect effects from a temporary slowdown in consumption due to weaker spending from furloughed workers and delay in business investments from policy uncertainty,” the Bank of America economists wrote.

The shutdown would have a bigger impact if it continues past February, the economists said. So far, there appears to be no end in sight with President Donald Trump locked in a stalemate with Democrats over his demand for funding for a border wall.

The New York Times reported that as of this coming Saturday, the government shutdown would be the longest gap in federal funding in the past 43 years, surpassing a 21-day shutdown during the Clinton administration in 1995. The newspaper noted that before 1981, agencies were able to operate even in a funding lapse by cutting out nonessential operations.

“”If the shutdown continues into March, funding lapses for food stamps could materially impact personal consumption and the cumulative drag from the shutdown could meaningfully cut growth in 1Q, although some of it would be made up once the government reopens and back pay is released,” the BofA economists noted.

A lengthier shutdown would also be a concern to Federal Reserve Chairman Jerome Powell. He said Thursday that short shutdowns have limited impact on the economy, but there’s never been a very long one.

“A longer shutdown is something we haven’t had. If we have an extended shutdown, I do think that would show up in the data pretty clearly,” said Powell. Speaking at the Economic Club of Washington D.C., he said the Fed’s ability to track the economy is also impacted by the shutdown since critical reports like retail sales and GDP are produced by the Commerce Department.

Moody’s also weighed in, saying the risks increase if the shutdown is lengthy. “Additionally, a lingering shutdown would have a broad-based negative effect on the US economy and on US entities including regional governments, consumer-oriented companies and consumer asset-backed securities. The longer the shutdown lasts, the more it will also strain liquidity for defense services contractors and certain municipal bond issuers that rely on federal funding,” Moody’s analysts wrote.

The shutdown has impacted funding for nine federal agencies, which account for about $325 billion of federal spending, or 25 percent of congressional appropriations and 7 percent of total federal spending, notes Moody’s.

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