The Cost of the Government Shutdown

Tue, Jan 22, 2019 - 4:10pm

Ryan Sweet, Director of Real-Time Economics for Moody’s Analytics spoke with Financial Sense’s Jim Puplava on the impact of the government shutdown on U.S. GDP and how it’s not only affecting thousands of American families but is beginning to trickle into areas of the economy like housing and small business. Sweet tells us when he predicts the shutdown will end and what happens if it continues into the coming months.

GDP and the Shutdown

Sweet explained a full government shutdown shaves a tenth of a percentage point off GDP each week. The current shutdown in the U.S. however, is a partial shutdown, so about 40 percent of federal workers are affected. Based on Sweet’s calculations, each week the shutdown in Washington continues, we take about 0.04 percentage point off of GDP. Sweet said, “another way to think about it is two or two and a half billion dollars per week is the cost of this government shutdown.”

Though, Sweet enumerated, losing GDP isn’t the only cost of the shutdown—there are other spillover effects that are harder to quantify. The SBA, Small Business Association is not making loans and by Sweet’s calculations, “that’s 200 million dollars per week and that’s significant, particularly for small businesses, they’re really the backbone of our economy.” According to Sweet, this lack of loans will lead to less hiring and weaker investment from small businesses.

The shutdown is impacting housing. The IRS can’t approve tax information for mortgages causing delay, though only a short-term delay. Sweet noted it’s important to keep in mind a lot of the delayed home purchases “will be made up in subsequent months and subsequent quarters, so we’ll get that back.”

If the shutdown continues into March, food stamps will come into question. Sweet noted that “every month about 4.8 billion dollars is payed out in food stamps.” It’s going to households that truly need the money and its money that’s spent and goes back into the economy very quickly. Sweet continued, “I would assume the Trump administration would find a way to extend that but if they don’t then that is an additional cost to the economy and would be visible on a reduction in consumer spending in March.”

Is There an End in Sight?

Sweet expects the shutdown to continue through January, hopefully ending near the end of the month or in early February. If that holds true, we’d be looking at “around two tenths of a percentage point off of first quarter GDP.” If the shutdown extended past the first quarter, we would see more than half a percentage point off of GDP.

Though Sweet doesn’t see it lasting that long, “I think it would be difficult to extend this past the first quarter politically…and I think the Trump administration recognizes this, they know that the economic costs are increasing every week this shutdown lingers on… so I do think hopefully it will end soon—the sooner the better.”

Sweet is most concerned with what this political brinkmanship will signify when the government has to raise the debt ceiling in March. “Anytime you get brinkmanship around a debt ceiling fight, the economic and the impact on the financial markets is much more significant than your normal government shutdown.” Sweet said the closer we get to this debt ceiling deadline, the more angst we can expect to see in financial markets and the greater the economic cost will be.

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