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The government shutdown could cause the US economy to shrink, Credit Suisse warns

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The government shutdown could cause the US economy to shrink, Credit Suisse warns

mcconnell workAP Photo/Bryan Woolston

  • Economists have lowered US economic growth forecasts since the partial government shutdown began.
  • About 800,000 government workers are bracing for a second missed paycheck this week.
  • As the impasse enters its fifth week, some see an economic contraction as a possibility.

After about a quarter of the US government was shut down in December, economists began to dim their outlooks for business activity in the country. But with the longest shutdown on record now entering its fifth week, some are considering the possibility of economic growth actually turning negative.

About 800,000 government workers were bracing for another missed paycheck this week as lawmakers and the president remained in gridlock over border security on Tuesday, a disruption that’s expected to have widespread consequences for the economy. While not their base case, Credit Suisse analysts said a contraction was possible in the first quarter.

“If the shutdown drags on though, a substantially larger impact is possible,” they wrote in a research note. “The timing of the current shutdown — right before tax return season — raises the stakes significantly. Missed paychecks for government workers will be a drag of several billion dollars. If tax refunds are significantly delayed, the short term economic cost could be in the 10s or even 100s of billions of dollars.”

With looming declines in spending, investment, and savings across the country, economists think first-quarter gross domestic product, the total value of the nation’s goods and services, could grow by well less than 2%. Economic growth came in at 2.2% for the same period last year.

Even internal estimates have become increasingly dismal in recent weeks. The White House expects the shutdown to deduct 0.13 percentage points a week from quarterly GDP growth.

President Donald Trump signed a bill last week ensuring back pay for workers going without pay during the shutdown, but the money cannot be distributed until the shutdown ends.

Until then, those who are furloughed or working without pay will dig into savings, skip debt payments, and run up their credit-card balances to maintain essential spending, according to Pantheon Macroeconomics’ chief economist, Ian Shepherdson. He thinks if the impasse lasts through the first quarter, it could bring reported growth to between 0.5% and 0.75% or lower.

“Second-round effects could then bring that number to zero, because creditors and suppliers of businesses hit by the shutdown will become less patient if it drags on,” he said. “Federal employees will receive their back pay, but that doesn’t mean that the businesses they patronize will be made whole by extra spending after the shutdown.”

While others see a first-quarter contraction as less likely, the shutdown has muddled outlooks for an economy already facing uncertainty on multiple fronts. A string of official economic data, including fourth-quarter GDP growth, are set to be withheld until government agencies like the Commerce Department resume operations.

“Overall a contraction is unlikely, but you also can’t rule it out,” the Moody’s economist Adam Ozimek said. “The fact that we are even discussing the possibility of a wholly government created contraction in GDP is enough to really make you scratch your head. The economy is strong, the recovery is still ongoing. This is an entirely unnecessary risk we are manufacturing.”

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