Shutdown's Economic Hit Seen to Be Muted

By Harriet Torry Features Dow Jones Newswires

The federal government shutdown could sideline significant numbers of federal employees and leave government contractors out in the cold, but in a $19.5 trillion economy with 147 million workers, a shutdown, even a long one, isn't expected to leave much imprint on the broader economy.

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The last government shutdown in October 2013 sent 818,000 workers, or 30% of all federal government employees, home without pay for more than two weeks.

Nonetheless, in the final quarter of 2013, the economy had its strongest performance in two years, notching growth at a 4% rate despite the 0.3 percentage point hit to gross domestic product the Commerce Department said the shutdown caused.

The labor market held up well during the shutdown period, too: U.S. employers created 212,000 jobs that October, up from 190,000 the prior month.

In 1995 the government shut down twice, for five days in mid-November and for three weeks from mid-December through the first week of the New Year. The economy grew at a 2.9% rate in the final quarter of 1995, 2.7% in the first three months of 1996 and then burst out with growth at a 7.2% rate in the quarter after that. While payrolls dipped by 15,000 in January 1996 after two months of gains, hiring bounced back in February with a bumper 429,000 new jobs.

This time around, economists say the impact of any shutdown on the broader economy will depend crucially on its duration. Most shutdowns in the past 40 years have lasted fewer than 10 days.

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"Relatively short-lived shutdowns of several weeks or less that occur early in the quarter often leave time for activity to recover later in the quarter, and the official GDP statistics may not see much, if any, drag," Barclays' analysts Shawn Golhar and Michael Gapen said in a note to clients. They expected a shutdown to shave 0.1 percentage point off annualized gross domestic product for each week it drags on in the quarter.

There have been 18 government shutdowns since 1977, ranging from a day to three weeks. Just six lasted more than 10 days. Ten lasted five days or less. Economists point out that shutdowns have little impact on economic data, in part because much government spending deemed essential, like defense and law enforcement, continues as normal. Moreover, mandatory spending, such as on Social Security and Medicare, continues since the shutdown only affects programs that go through annual appropriation processes.

"Over time they've found a snooze button to make it less costly," said Vincent Reinhart, chief economist at Standish Mellon Asset Management, by designating more workers as essential.

That is little consolation for government workers not getting paid for an indeterminate period. And while furloughed government employees usually receive back pay, the lost productivity of the hours they were idle isn't easily recouped.

Pamela Gilbertz, a health-communications specialist at the Centers for Disease Control and Prevention in Atlanta, said the shutdown means many workers won't be able to log on to the CDC network to check email, or download the pay statements needed to apply for unemployment benefits.

"For the majority of people it's very difficult to miss even one paycheck because people have bills to pay and there aren't a lot of people who have the financial resources to cover everything," she said.

Indirect costs also pile up for government contractors who can't bill hours during a shutdown, yet have to keep up with their own outlays.

Looking back at the 16-day shutdown in October 2013, "you can see the impacts" in Washington and other regions with many federal workers, said Ellen Zentner, chief U.S. economist at Morgan Stanley. But when it comes to the economy as a whole, "it's very difficult to see that there was an impact," she said.

--Ben Leubsdorf contributed to this article.

Write to Harriet Torry at harriet.torry@wsj.com

(END) Dow Jones Newswires

January 21, 2018 11:38 ET (16:38 GMT)