Thursday, July 18

U.S. Government Shutdown Is Unlikely to Cause an Immediate Recession

Federal government shutdowns have become so common in recent years that forecasters have a good read on how another one would affect the American economy. The answer is fairly simple: The longer a shutdown lasts, the more damage it is likely to inflict.

A brief shutdown would be unlikely to slow the economy significantly or push it into recession, economists on Wall Street and inside the Biden administration have concluded. That assessment is based in part on the evidence from prior episodes when Congress stopped funding many government operations.

But a prolonged shutdown could hurt growth and potentially President Biden’s re-election prospects. It would join a series of other factors that are expected to weigh on the economy in the final months of this year, including high interest rates, the restart of federal student loan payments next month and a potentially lengthy United Automobile Workers strike.

A halt to federal government business would not just dent growth. It would further dampen the mood of consumers, whose confidence slumped in September for the second straight month amid rising gas prices. In the month that previous shutdowns began, the Conference Board’s measure of consumer confidence slid by an average of seven points, Goldman Sachs economists noted recently, although much of that decline reversed in the month after a reopening.

Gregory Daco, the chief economist at EY-Parthenon, said a government shutdown would not be a “game changer in terms of the trajectory of the economy.” But, he added, “the fear is that, if it combines with other headwinds, it could become a significant drag on economic activity.”

Jared Bernstein, the chairman of the White House Council of Economic Advisers, said in a statement on Wednesday that the council’s internal estimates suggested potential losses of 0.1 to 0.2 percentage points of quarterly economic growth for every week a shutdown persisted.

“Programmatic impacts from a shutdown would also cause unnecessary economic stress and losses that don’t always show up in G.D.P. — from delaying Small Business Administration loans to eliminating Head Start slots for thousands of children with working parents to jeopardizing nutrition assistance for nearly seven million mothers and children,” Mr. Bernstein added. “It is irresponsible and reckless for a group of House Republicans to threaten a shutdown.”

Goldman Sachs economists have estimated that a shutdown would reduce growth by about 0.2 percentage points for each week it lasted. That’s largely because most federal workers go unpaid during shutdowns, immediately pulling spending power out of the economy. But the Goldman researchers expect growth to increase by the same amount in the quarter after the shutdown as federal work rebounds and furloughed employees receive back pay.

That estimate tracks with previous work from economists at the Fed, on Wall Street and in prior presidential administrations. Trump administration economists calculated that a monthlong shutdown in 2019 reduced growth by 0.13 percentage points per week.

After that shutdown ended, the Congressional Budget Office estimated that real gross domestic product was reduced by 0.1 percent in the fourth quarter of 2018 and 0.2 percent in the first quarter of 2019. Although the office said most of the lost growth would be recovered, it estimated that annual gross domestic product in 2019 would be 0.02 percent lower than it would have been otherwise, amounting to a loss of roughly $3 billion. Because growth and confidence tend to snap back, previous shutdowns have left few permanent scars on the economy. Some economists worry that might not be the case today.

Mr. Daco said federal workers might not spend as much as they would have absent a shutdown, and government contractors might not recoup all of their lost business.

A long shutdown would also delay the release of important government data on the economy, like monthly reports on jobs and inflation, by forcing the closure of federal statistical agencies. That could prove to be a bigger risk for growth than in the past, by effectively blinding policymakers at the Federal Reserve to information they need to determine whether to raise interest rates again in their fight against inflation.

The economy appears healthy enough to absorb a modest temporary hit. The consensus forecast from top economists is for growth to approach 3 percent, on an annualized basis, this quarter. But economists expect growth to slow in the final months of the year, raising the risks of recession if a shutdown lasts several weeks.

Diane Swonk, the chief economist at KPMG, said she expected G.D.P. to rise about 4 percent in the third quarter, and then slow to roughly 1 percent in the fourth quarter. She said that a two-week shutdown would have a limited impact, but that one lasting for a full quarter would be more problematic, potentially resulting in G.D.P. entering negative territory.

“When you start nicking away even a tenth here or there, that’s pretty weak,” Ms. Swonk said.

A shutdown could also further convey political dysfunction in Washington, which could rattle investors and push up yields on Treasury bonds, leading to higher borrowing costs, Ms. Swonk said.

Biden administration officials had hoped to avoid such dysfunction when they reached a deal with Republicans in June to raise the nation’s borrowing limit. That agreement included caps on federal spending that were meant to be a blueprint for congressional appropriations. A faction of Republicans in the House has pushed for even deeper cuts, driving Congress toward a shutdown.

Michael Linden, a former economic aide to Mr. Biden who is now a senior policy fellow at a think tank, the Washington Center for Equitable Growth, said immediate economic effects from the shutdown could force Republican leaders in the House to quickly pass a funding bill to reopen the government.

“There’s a reason shutdowns tend to be pretty short,” Mr. Linden said. “They end up causing disruptions that people don’t like.”