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article imageTrump's shutdown is becoming catastrophic for the economy

By Business Insider     Jan 16, 2019 in Politics
The US government shutdown is now the longest in the country's history and has shown no signs of abating.
JPMorgan CEO Jamie Dimon has suggested that US economic growth could go to zero, and one analyst said it could even go negative.
The US-China trade war and a looming conflict about the debt ceiling are creating a perfect storm.
We're 26 days into the record-breaking US government shutdown, and while most economists agree it will weigh on US economic growth, the chorus of warnings about doomsday scenarios is getting louder.
Government shutdowns have typically lasted a few days or a couple of weeks, but the fight between President Donald Trump and Democrats appears set to continue for much longer. According to economists, the negative effects of the shutdown will only grow as the ripple effects from the 800,000 federal employees and millions of government contractors going without pay spread throughout the economy.
Adding to the gloom is the negative effect of the US-China trade war, falling stock prices, growing worries about a slowdown in international growth, and a looming conflict about the debt ceiling.
Given all of the worries facing the US economy, warnings about the shutdown are only amplifying:
Bank of America Merrill Lynch on Wednesday reiterated its concern about the economic cost of the shutdown. It "definitely becomes a significant shock if it lasts for months rather than weeks," Ethan Harris, the head of global economics research, told the Financial Times. "There is a sensitivity in the markets to signs of dysfunction in Washington."
Standard & Poor's said the cost of the shutdown could soon equal Trump's demand for $5.7 billion to build a wall along the US-Mexico border.
The White House even increased its internal estimate of the hit to gross domestic product. A White House official confirmed to Business Insider that the Trump administration's model estimated that the shutdown would shave off 0.13 percentage points from GDP for every week of the shutdown — higher than the 0.08 percentage points originally assumed.
JPMorgan CEO Jamie Dimon said Tuesday that the shutdown was a serious problem for the US economy and cited research that found US GDP growth could go to zero if the shutdown continued.
Pantheon Macroeconomics' Ian Shepherdson was even more bearish, warning that if the shutdown were to last through March, the US's first-quarter GDP growth could be negative.
BAML's figures actually suggest that for each week the government is shut down, US GDP growth is cut by 0.05 percentage points. This is half the economic impact of the 2013 shutdown because this one affects only part of the government. But the economists warned that the pain could get exponentially worse as the fight continues.
Another major concern is the possibility that the shutdown will affect the US's credit rating. During the 2013 shutdown fight over the debt ceiling, the US was downgraded to AA+ by S&P, a historic first for the country. While Fitch maintained the US's AAA rating in 2013, James McCormack, the agency's global head of sovereign ratings, warned that a downgrade was possible in 2019.
"The longer this shutdown drags on, the more collateral damage the economy will suffer," analysts at S&P said last week.
There are a variety of reasons for the shutdown slowdown. For instance, figures from 2013 suggest that federal workers spent 10% to 15% less while they went unpaid, reducing consumer spending.
The shutdown also exacerbates worried about potentially more economically damaging fights in Congress, the most pressing of which is the need to raise the debt ceiling in the coming months.
As it stands, the debt ceiling, or the statutory limit on the amount of debt the federal government can hold, kicks back in on March 1. While the US Treasury can maintain funding through special measures, the ceiling will still need to be lifted by Congress sometime over the summer.
Some analysts have said the historic dysfunction over the shutdown sets a nasty precedent for a debt-ceiling fight. Without an increase in the ceiling, the US could default on some of its debt, an unprecedented move that would send shockwaves throughout the global economy.
"Normally, the debt ceiling ends up being lifted, but with deadlock in Congress" there's added risk, said Neil MacKinnon, a global macro strategist at VTB Capital.
This article was originally published on Business Insider. Copyright 2019.
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