Well, the US is all set to get back to business this week following a 4,675-day (roughly) shutdown that landed federal workers in modern-day soup lines and caused air traffic to grind to a halt last week.
If there’s a silver lining (there’s not), it’s that we all got to watch a dejected Trump meander out into the Rose Garden and bend the proverbial knee to Nancy Pelosi, who, in case you haven’t noticed, is basically President now.
Trump insists that if he doesn’t get his wall by February 15, he’ll be forced to shut the government down again and/or declare a farcical national emergency because you know, “women are taped up in the back of vans” or whatever.
To be sure, Trump’s humiliating Friday relent likely isn’t the end of this. It’s clear that he isn’t going to get $5.7 billion for his “invisible slats”, but if Saturday was any indication, he’s not anywhere close to throwing in the towel completely when it comes to securing some kind of package spending deal that he can disingenuously insist constitutes “promises made, promises kept” when screeching about the wall.
Probably the best he can hope for is a deal that includes enough spending on wall alternatives (e.g., technology, improvements to existing barriers, etc.) to make the headline number sound like it’s close to the $5.7 billion figure. The risk is that he can’t get there, in which case you can assume he’ll take one more stab at brinksmanship next month.
In the meantime, analysts are busy trying to quantify the impact of the longest shutdown in history on the economy. Again, this is probably a bit premature, because it seems just as likely as not that the three week CR will mark but an interlude, meaning this will end up being a months-long shutdown with a break in between.
Whatever the case, Goldman is out with a first stab at estimating the economic hit. They start with the mechanical impact.
“The most straightforward GDP effects relate to federal employee furloughs”, the bank writes, in a note out Saturday. “Approximately 17% of federal employees were furloughed (not working, without pay), while about 23% were required to work without pay”, Hatzius and co. continue, adding that “although both groups will receive backpay in coming days, the furloughs will still weigh on federal real output, which is measured based on the quantity of inputs consumed.”
All told, Goldman expects the “hours worked” channel to lop a shade over 0.2pp from Q1 GDP growth. That comes in addition to a 0.07pp drag from Q4 of last year.
As far as the knock-on effects go, Goldman notes that “year-to-date contract payments have declined by 68% (yoy) in departments affected by the shutdown (and -39% across all departments other than the Department of Defense, for which 2019 data is unavailable).”
Of course contractors won’t get back pay (this was a particularly vexing issue that started to get a lot of media attention starting a couple of weeks ago). Goldman notes that following the October 2013 shutdown, contractor payments “continued to fall on a year-over-year basis.” Here’s their estimate along with the visual:
As shown in Exhibit 3, we estimate this $3.3bn shortfall will directly weigh on Q1 GDP growth by just under 0.15pp, as around half of these payments should be captured in the quarterly source data for federal consumption and investment GDP.
Beyond that, Goldman thinks the impact will be “modest.”
“While liquidity-constrained government workers and private contractors (some of whom have missed 2 paychecks) likely weighed on January discretionary spending, the full-quarter impact should be muted by the arrival of federal retroactive pay in coming days”, the bank says, on the way to concluding that “the consumption effects will be -0.1pp or less.”
All told, then, Goldman expects the shutdown will exert a 0.4pp drag on Q1 growth. The end result is that the bank is (again) lowering their Q1 GDP forecast, to 1.7%.
The “again” reference there is to a December note that found Hatzius slashing his growth target. That cut came courtesy of the expected fading of the fiscal impulse and the drag from tightening financial conditions.
This was the worry from the beginning of the shutdown. Everyone knew the fiscal sugar high was set to abate starting in Q1 and the equity market selloff presaged a hit to the vaunted “wealth effect”. When you pile the shutdown on top of that, you end up with a formidable headwind.
Of course Goldman expects a commensurate boost in Q2 once things get back to “normal”. Specifically, they’re lifting their Q2 estimate to +2.4%. That assumes we don’t find ourselves right back in the same spot three weeks from now after Democrats refuse to fund the wall.
Anyway, the bank goes on to deliver an upbeat take on underlying growth momentum. Here’s their conclusion:
Taken together, these considerations suggest that the temporary drag from the shutdown will be manageable and US growth is likely to remain at or above potential in the first half of the year.
So, you can take comfort in that – or not. It’s up to you.
Now let’s all take a trip down memory lane to July and have a hearty laugh…