The Widening Effects of the Federal Shutdown

The Impacts of the Shutdown Extend Well Beyond Washington

Jan 24, 2019
Finance

By Elinda F. Kiss

SMITH BRAIN TRUST – As the federal shutdown continues, now well past 30 days, its effects are reaching ever wider. The shutdown has about 800,000 federal workers missing a second paycheck. This includes furloughed personnel, who are said to have lost an average of $5,600 in wages.

Economists now expect a sharp reduction in economic growth in the first quarter of 2019. The President's Council of Economic Advisers (CEA) has estimated that for every week the shutdown lasts, quarterly economic growth will be reduced by .13 percent or more than 1.5 percent for the first quarter – assuming the shutdown continues.

In an interview with CNN this week, President Trump's top economic adviser said the U.S. economy might see zero growth for the first quarter if the partial government shutdown goes on much longer.

As for the analysts, a Bloomberg survey of 30 economists yielded a collective projection that the GDP will be cut by 0.25 percent if the shutdown extends into February. Mark Zandi of Moody's estimates that first quarter GDP will drop by 0.5 percent.

Still, the CEA and others do expect the economy to pick up some of the loss once the shutdown is over and the employees receive back pay.

Nonetheless, there can be long-lasting effects. First, consider the output lost due to the furloughed government workers. Then there’s damage to market confidence – assuming this drags on much longer. Also compromised is faith in government being able to perform even the most basic functions. And some employees will leave to work in the private sector, leading to brain drain.

To get an idea of the costs, the Office of Management and Budget (OMB) estimated the shutdowns of 1995 and 1996 cost $1.2 billion. Also, OMB estimated $2 billion in payroll costs from the 2013 shutdown plus up to $6 billion in lost economic output. And, these costs do not include the cost to government contractors who may not get any back pay; those costs are harder to estimate.

Indirect Costs

Furloughed and non-paid working employees are curbing their spending. This has major, negative implications for D.C.-area restaurants and the Washington Metropolitan Area Transit Authority. D.C. metro has lost $400,000 each day due to the drop in ridership and reduced parking revenue.

Elsewhere, the Small Business Association has stopped originating new loans; the SEC has not approved new IPOs; and farmers have not received aid payments that were intended to alleviate pain caused by trade conflicts.

TSA and the Super Bowl

Non-paid and no-show TSA workers are affecting travel through the country’s airports. It’s been estimated that a prolonged shutdown could lead to a drop of 20 percent in air travel, which could cost the United States 120,000 industry jobs, plus $16 billion in annual GDP.

That could mean fewer fans traveling to the Super Bowl. And if fewer people travel to Atlanta for the big game, that’s fewer who will spend money there. The shutdown further stands to negatively impact Department of Homeland Security agencies involved in coordinating security for the game.

Meanwhile, as the economy slows, the Federal Reserve may slow its pace of interest rate increases.

And though we don't have a good measure of the psychological impact of the shutdown, the University of Michigan's index of consumer sentiment dropped by 7.7% in January from the previous month – its lowest level during the Trump presidency. The decline is said to be “due to a host of issues, including the partial government shutdown, the impact of tariffs, instabilities in financial markets, the global slowdown, and the lack of clarity about monetary policies.”

Elinda F. Kiss is an associate clinical professor of finance at the University of Maryland's Robert H. Smith School of Business.

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About the Expert(s)

KissElinda
<p>Professor Elinda F. Kiss' primary areas of research include Bank Regulation, Finance and Banking Crises and Fixed Income Securities. She teaches Corporate Finance, and Banking in both the undergraduate and MBA programs. Prior to teaching at the Smith School Professor Kiss has served as Associate Professor in the Departments of Finance and Accounting at Rutgers University and as Assistant Professor or Lecturer at the Wharton School, Wellesley College, and Temple University.</p>

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