The Shutdown and the Economy

Most Americans do not notice the effect of the shutdown. Unless they are dealing with affected agencies, they likely can go on with their lives oblivious to it. Sure, if you are in Washington, and intend to visit the Smithsonian, forget about it. TSA employees are likely more grumpy than usual, with good reason. And occasionally you may come across a family that cannot afford milk for the kids, or diapers or rent. But in reality, most Americans are not directly affected.

However, there are real effects on the wider economy every time we have a shutdown. These are effects that will show up in the economic ledger of the nation. And this is becoming a conversation already. According to USA Today:

“I don’t think (a two-week shutdown) shows up on the radar screen,” especially since government work typically slows down anyway during the Christmas and New Year’s holidays, says Mark Zandi, chief economist of Moody’s Analytics

But if the impasse drags into late January or beyond, it could take a noticeable toll by dampening federal workers’ productivity, temporarily halting their paychecks, closing national parks, suspending federal funding for loans and delaying tax refunds, among other impacts.

The biggest damage could be inflicted on consumer and business confidence that’s already been dented by the recent stock market selloff.

Incidentally, we are likely in the beginnings of a bear market. And the global economy is starting to slow down, as expected. The Wall Street sell-off continued, today was due to the rare announcement from Apple of lower quarterly sales. And those are stemming from a slowed down Chinese market. In other words, China is getting a cold, and the contagion might give the rest of us pneumonia.

This speaks to the size of the Chinese economy and the global nature of corporations. It used to be that if the US got a cold, the rest of the world got pneumonia. We seem to be entering an era where this is the case with the Chinese economy and the Trade War is not just affecting American soy farmers (who are getting relief payments from the feds, with money taken on loan from China.)

This is to the tune of $12 billion dollars incidentally.

And there is a relationship to the shutdown. While a holiday shutdown may have a negligible effect on the economy, due to less activity by the federal government, anything longer than that, will. According to the Committee for a Responsible Federal Budget:

If the shutdown lasts longer, more government services and agencies will run out of funding. Furloughed employees won’t receive their paychecks and consumer spending could drop. Consumer confidence will almost certainly drop as Congress remains at an impasse, and government contractors would lose much, if not all, of their business. There are also many government operations which are helpful to a smooth flow of commerce, like new IPOs approved by the SEC, the monthly jobs report produced by the Department of Labor, and the approval of export licenses. If a shutdown lasts only a few days or a week, these factors likely won’t have a large effect. But if the shutdown persists, these larger economic effects will start to show up.

In other words, the effects will trickle throughout the economy, reducing demand and productivity. The economy is already in what seems to be the end of an economic cycle. President, who really do not control the economy, like to tell us how great the economy is, but blame others when it goes down. This shutdown could make a cyclical slowdown, even recession, deeper. It may also trigger it earlier than it would otherwise.

Why?

Lower consumer confidence translates to loser spending. So buckle up, times could get interesting. Especially since both sides are dug in. Oh, and the Democrats will not own it. We have the tape. This is the Trump Shut down, and he has been trying hard to get responsibility off his shoulders, never mind that he embraced it.

Written by

Historian by training. Former day to day reporter. Sometimes a geek who enjoys a good miniatures game.

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