Economists have been revising the GDP growth and economic forecasts ever since the record-long government shutdown began in December, and Credit Suisse is warning that things are about to get a whole lot worse, and could even turn growth negative.
“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.”
As 800,000 federal workers are bracing for a second straight missed paycheck due to a stalemate over President Donald Trump’s border wall, Credit Suisse analysts are warning an economic contraction is now possible for the first quarter of 2019.
“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 fall to well below 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 from quarterly GDP each week.
In the meantime, people will dig into savings, skip debt payments and run up their credit card balances in order to maintain essential spending, according to Pantheon Macroeconomics chief economist Ian Sheperdson. 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.”
Others see contraction as unlikely but the threat grows with each passing day that the government remains closed.
“Overall a contraction is unlikely, but you also can’t rule it out,” said Moody’s economist Adam Ozimek. “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.”
