The US Government shutdown started on December 22 2018 is currently the longest ever, with little evidence of end in sight.
In recent US history, since 1976, there have been 21 shutdowns, lasting from 1 to 21. The longest so far took place under Clinton on Dec 15,1995.
The current impasse, which is stemming from a political clash between the US President, unwilling to sign any budget resolution not including spending for Mexican wall ( budget of about $5.7 bn) and Democratic Party opposing this expense, is particularly of a concern as example of the policy risks lying ahead for the US Economy.
In fact it opens the question on how it could be difficult for the new split Congress to address the looming debt ceiling (March 2019) and develop a coherent budget policy in a context where likely the US economy will decelerate this year.
Moreover, albeit being a partial shutdown ( involving only a part of the federal agencies usually involved in a full government shutdown) the longer it lasts, the higher is the economic cost both in direct and indirect terms.
In particular, this is true for the outlook on Domestic demand, via Personal Consumption:
- While permanent workers could recoup their lost pay, contractors may not be able to do so, with a meaningful economic impact on their ability to spend or repay debt on a temporary basis ( credit cards, loans, mortgages) the longer the shutdown extends;
- The shutdown could delay tax refunds with potential impact also on a broader pool of consumers ( forgone possible boost from TCJA 2017 tax refunds many analyst expected in Q1 2019);
- Discretionary consumption will therefore be hit more significantly, with part of the forgone consumption likely lost and not recovered lately ( no complete offsetting effect within the quarter once shutdown in closed)
- Some contribution to GDP may be lost with no possible recovery ( productivity);
- Confidence generally is hit when a shutdown occurs, both at consumer and business levels, as it creates uncertainty about future policies. And the longer it last, the higher may be the impact. This is particularly of a concern as confidence already started a moderating path.
Analysts estimates of the economic impact of the shutdown range from $1.2 to $2.0 billion of Real GDP for every week of the shutdown and prompted already some downward revisions to Q1 GDP expectations, in line with what we also did recently.