The Economic Cost of the U.S. Shutdown Showdown

The partial U.S. government shutdown that began on 22 December 2018 has entered its record-setting fourth week, with no clear resolution in sight. Although the $5.7 billion of border wall funding at the heart of the shutdown is small relative to the annual $4 trillion government budget, its symbolic significance is such that neither side seems close to relenting – nor does a bigger deal on immigration seem likely.

The shutdown affects 25% of the government, with more than 800,000 employees either furloughed or working without pay and a panoply of functions currently offline. While we believe the shutdown on its own would have only a modest impact on growth, the combined impact of this and other short-term drags on the economy could slow first-quarter growth close to the zero mark – an outcome that would weigh on markets and make the Federal Reserve’s decision about whether to pause rate hikes in March even more straightforward.

Dim prospects for a deal

Our view is that a negotiated resolution between President Donald Trump and congressional Democrats is unlikely and that the president will ultimately declare an emergency under the 1976 National Emergencies Act, which would allow him to reappropriate already allocated dollars toward building his desired wall on the southern border.

While this move would likely be contested (and potentially blocked) in the courts – not to mention draw the ire of conservative Republicans, who consistently complained of executive overreach by President Barack Obama – it could achieve two desirable political outcomes for the president: 1) It would show the president’s base of support that he is committed to building the border wall and will do anything to follow through on his promise; and 2) It would allow him to reopen the government and therefore help mitigate any further political fallout (according to RealClearPolitics polls, the president’s approval ratings have suffered during the shutdown).

Economic costs

The economic costs of the government shutdown are rising. We estimate that the reduction in government hours worked will dent real GDP growth by 0.1 percentage point for fourth-quarter 2018 and by 0.3–0.4 percentage point in the first quarter of this year, assuming the government reopens relatively soon – a modest but likely permanent hit to real GDP. In the past, Congress has made up the lost pay for furloughed workers, and we would expect them to do so again. However, because the Bureau of Economic Analysis (BEA) measures real government consumption by estimating the number of hours worked by government employees, and since the lost hours of furloughed employees are not likely to be made up later, the lost GDP will likely never be regained.