Expect Aftershocks From the Government Shutdown

Economic Forecasts

Expect Aftershocks From the Government Shutdown

The next concern: Economists worry that lawmakers will fail to reach a debt-ceiling deal.

Illustration by Mitch Blunt

The longest government shutdown in history is now history—but its impact on the economy may linger well into the year.

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According to estimates by the Congressional Budget Office, the 35-day partial shutdown that ended January 25 will ding the U.S. economy by about $3 billion. But Tony Roth, chief investment officer at Wilmington Trust, says the actual damage could be two to three times higher than the CBO’s $3 billion figure. That’s because the CBO looked at only the direct costs of the shutdown, not the harder-to-measure indirect costs, such as travel plans that were called off or executives who delayed or canceled spending to maintain or expand their businesses.

Roth says he still has a positive view of the economy and the U.S. stock market, although he reduced his outlook for gross domestic product growth by 0.2 percentage point, to a range of 2% to 2.25% for 2019. That revised GDP forecast, which is below Kiplinger’s 2.45% forecast, takes into account not only the shutdown but other issues, such as China’s slowing economy and the impact of tariffs.

A more worrisome effect of the shutdown is that it foreshadows more dysfunction in Washington that could affect trade pacts and Uncle Sam’s borrowing power. The Treasury Department is expected to have enough money to pay the bills only until mid to late summer. If lawmakers don’t raise the debt ceiling at that point, the country will default on its obligations, which would be “near catastrophic for the global economy,” Roth says.

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But Mark Zandi, chief economist at Moody’s Analytics, doesn’t think that will happen. “This experience with the shutdown and the political fallout make it less likely they’ll play brinkmanship around the debt limit,” Zandi says.

A hit to consumer confidence. As the shutdown dragged on for weeks, consumers were made acutely aware of how entwined their lives are with the federal gov­ernment. The shutdown threatened to delay tax refunds and mortgage closings, stopped food safety inspections, and disrupted travel, leading to long airport security lines and causing a brief halt in flights at LaGuardia because the airport didn’t have enough air traffic controllers.

Those events, on top of stories about federal workers and contractors at risk of losing their homes as they struggled to get by without paychecks, likely contributed to a plunge in consumer confidence. The Conference Board reported a much larger than expected drop in consumer confidence in January, the third monthly decline in a row.

SEE ALSO: Kiplinger’s Economic Outlooks

Consumer confidence is key to a healthy economy because consumer spending accounts for 70% of the U.S. economy. Economists say the shutdown may lead to increased savings and reduced spending among some of the 800,000 federal workers whose paychecks were delayed, as well as the hundreds of thousands of federal contractors and service providers who won’t get back pay. And it may cause others to prepare for a financial shock, too. But the shutdown is unlikely to dampen consumer spending overall, economists say.

There is one silver lining to the shutdown: Democrats and Republicans in Congress have introduced legislation to ban shutdowns.