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Old 01-17-2019, 11:03 AM
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Exclamation It will take more than a partial government shutdown to cause a recession

It will take more than a partial government shutdown to cause a recession

By Robert Romano

As the partial government shutdown enters day 27, the longest in U.S. history, Congressional Democrats still refuse to even discuss funding the President’s proposed southern border wall expansion. And now, some analysts are warning that if the shutdown continues, it could lead to recession.

“Shutdown raises the risk of recession,” warns one headline from Politico.

“Slok Says Government Shutdown Could Cause a Recession,” warns another from Bloomberg, quoting Torsten Slok, chief international economist of Deutsche Bank.

“Jamie Dimon says shutdown could reduce economic growth to zero this quarter if it continues,” states CNBC, quoting J.P. Morgan Chase CEO Jaime Dimon.

But even taking the generous estimates of reduced output for granted, it’s hard to make the case that leaving the government shut down would on its own cause a recession, if you define it as two consecutive quarters of negative growth. The affected federal government departments and agencies in question simply do not spend enough money for that to be the case.

The U.S. economy nominal Gross Domestic Product was $20.7 trillion annualized in the last report from the Bureau of Economic Analysis.

Estimates on the partial government shutdown suggest about $2 billion every two weeks in withheld pay from affected about 800,000 affected federal workers, according to the Center for American Progress, who will be awarded backpay when it’s all over.

In addition, Bloomberg estimates about $245 million a day or $3.4 billion government contractors are not paid every two weeks.

Together, that works out to potentially $35 billion every quarter in diminished output, or $140 billion annualized.

Suffice to say, that would come out of GDP. Government consumption expenditures are defined by the Bureau of Economic Analysis as “Expenditures consisting of compensation of general government employees, consumption of fixed capital (CFC), and intermediate purchases of goods and services…”

But that still may not be enough to cause a recession, as it only accounts for 0.67 percent or 2.7 percent annualized of the $20.7 trillion GDP calculated on an inflation-adjusted, quarterly pace.

So, for it to erase all of the potential gains, the rest of the economy would have to grow at 2.7 percent or less in the first quarter. Anything more, say, it grows at 3 percent, then it will still be technically positive for the first quarter.

And after that, since government expenditures in the real GDP don’t tend to grow that much quarterly — they contributed about 0.2 percent to GDP growth in the third quarter — the U.S. economy would essentially shrug off the spending cut by the time the second quarter of 2019 rolled around as a new baseline for government expenditures was established, assuming the shutdown lasted that long.

Therefore, you wouldn’t see a recession, defined as two consecutive quarters of negative growth, if government spending is cut $35 billion in the first quarter.

Plus, since everyone would be awarded backpay anyway, the expenditures are simply being moved forward in time. So, what was not spent in the first quarter would be paid in the second quarter, in addition to all the expenditures that would have happened in the second quarter anyway.

The money is going to be spent in the end. Congress has already passed a law that will automatically award backpay when the shutdown ends anyway. But even if they weren’t, any slowdown, owing singularly to the government workers and contractors not getting paid should only be temporary.

Robert Romano is the Vice President of Public Policy at Americans for Limited Government.
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Old 01-17-2019, 11:27 AM
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Arrow The government shutdown is not hurting the economy much, but it still comes with a co

The government shutdown is not hurting the economy much, but it still comes with a cost
Published: Jan 9, 2019 2:51 p.m. ET

D.C. dysfunction, delayed economic data leave investors on edge

The U.S. economy has largely escaped unscathed from a partial government shutdown that’s putting a squeeze on 800,000 federal workers and their families, but it doesn’t mean the political paralysis in Washington comes without a cost.

Leading economists at America’s biggest banks say the shutdown has shown hardly any rippling effects. Federal workers who’ve been furloughed are just missing their first paychecks.

“The partial shutdown is, in our view, only a minor drag on the economy to date,” said Robert Dye, the newly appointed chairman of the economic advisory committee of the American Bankers Association.

He and other economists estimate the shutdown might knock off a tenth or two of a percentage point from gross domestic product, perhaps a bit more if it lasts a few weeks longer.

“It’s very difficult to put a number on,” Dye said. “Certainly if it were to extend into another paycheck cycle or two it could exert some meaningful drag on the economy.”

That’s still a drop in the bucket for the world’s largest economy, however.

The most immediate problem —beyond the families directly affected — is a lack of clarity about what’s going on in the economy at a time when worries about a recession have grown and investors are anxious.

The federal government, for instance, has delayed key reports on housing and the trade deficit that normally are released by agencies now closed. If the shutdown doesn’t end soon, other critical surveys on inflation, business investment and gross domestic product could also be delayed.

The most long-lasting damage from the shutdown might be more symbolic or psychological, especially for investors who loathe uncertainty.

The turmoil in Washington is widely viewed as a contributor to the Wall Street selloff SPX, +0.33% (re: in December that wiped out all the stock-market gains for the year.

“For the markets the shutdown is just another reminder of how dysfunctional Washington is,” said Ethan Harris, global economist at Bank of America Merrill Lynch. “The market has been overwhelmed with uncertainty.”

The uncertainty might not end soon, either.

Even after Democrats and Republicans find a way to end the shutdown, they’ve been engaged in long-running skirmishes over the level of federal spending and U.S. debt.

In the next several months, for example, the two parties need to agree to increase a federal limit on how much debt the federal government can carry.

Fights over the debt ceiling have broken out repeatedly in the past eight years. It’s always gets raised, but not before a lot of political posturing that puts Wall Street and sometimes the rest of the world on edge.

The bond-rating agency Fitch said the U.S. risks losing its pristine triple-A credit rating later this year if the government shutdown persists and or another standoff over the debt ceiling ensues.

O Almighty Lord God, who neither slumberest nor sleepest; Protect and assist, we beseech thee, all those who at home or abroad, by land, by sea, or in the air, are serving this country, that they, being armed with thy defence, may be preserved evermore in all perils; and being filled with wisdom and girded with strength, may do their duty to thy honour and glory; through Jesus Christ our Lord. Amen.

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