- On Saturday 22nd of December, a new (the third for this year) government shutdown took place in Washington DC, involving part of the federal agencies (9 out of 15):it is a partial shutdown.
- The two previous government shutdowns (full) were brief in duration: Friday 19th of January 2018, resolved on Monday 22nd January; and the 8th of February, lasting one day.
- The current shutdown, still ongoing as we write, generated from a fight between Democrats and President Trump over 5bn funding for wall construction on the US-Mexico border, opposed by Democrats as wasteful and ineffective, while president Trump campaigned on it as a key measure for border security.
- As we write, there is no deal in sight yet, although the funding involved does represent only a small fraction of the overall federal budget. Some declarations seem to point to some progresses in negotiations, with few bills on the Democratic side being prepared to fund the majority of federal agencies till end of September (except Dept of Homeland Security, till February 8th), while the President reportedly invited congressional leaders to the White House for a meeting to resolve the issue this week (but maintaining a confrontational rhetoric).
- In the meantime, the shutdown extends into 2019, to be dealt with by the new, split, 116th United States Congress from January 3rd.
- The economic impact is for now estimated to be limited, as the shutdown is only partial and is taking place over the holiday season; yet, if further extended, it could have negative effects.
- As a benchmark, the shutdown of October 2013, lasting for 16 days (but please note it was a full government shutdown), reduced real GDP growth in Q4 2013 by 0.3% on an annualized basis (according to the Bureau of Economic Analysis); other forecasters estimated $1.5 billions were lost each of the 16 days of shutdown. Estimations are difficult, as they may not take into account direct and indirect effects of the shutdown.
- As already said, this is only a partial shutdown, so the impact per day may be more limited than in October 2013, but the length of the extension is key; this because not only of the direct impacts of workdays lost and furloughed workers, but due to the impact on confidence. Uncertainty is corrosive to growth. As an example, during the 2013 shutdown, consumer confidence fell sharply to a 10 months low (University of Michigan Consumer Sentiment). And the US economy is already entering a phase of growth moderation into 2019, from 2018 peak.
- According to Amundi estimates, growth will decelerate from near 3% in 2018 to approximately 2.5% in 2019 and to potential in 2020, with a sharper deceleration in 2H 2019 (see chart). Should confidence be hit significantly, it could weigh on domestic demand at least in Q1, posing some downside risks.
- The development of the negotiations to solve the shutdown is setting the stage for the next two years of political debate between the Trump administration and the new split Congress; in fact, albeit Republicans will hold majority in the Senate in 2019 (53 seats), they need Democratic votes to get to the threshold of 60 votes to pass funding measures.
CFA, Senior Economist
CFA, Senior Economist