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Impact of the US federal government shutdown

09 January 2019 Joel Prakken, Ph.D.

The shutdown lasted the last ten days of 2018, enough to reduce directly the fourth-quarter growth rate of real GDP by 0.12 percentage point relative to a "no-shutdown" baseline. Assuming the shutdown lasts two weeks into 2019, the effect would be to reduce first-quarter GDP growth by 0.06 percentage point, but then boost second-quarter GDP growth by 0.18 percentage point as federal employment returns to normal.

The direct impact of the shutdown on real GDP is the real value of the government services not produced by the furloughed workers. The production is lost forever, as the workers will not make up the time lost in the workplace after the government reopens. Consequently, the direct impact does not depend on when, during the quarter, the shutdown occurs.

The indirect impact of the shutdown is reflected in BEA's source data and so is not directly observed. For example, workers whose pay is delayed may delay spending, temporarily reducing personal consumption. Or, private commerce and spending might be disrupted by delays in the issuance of licenses and permits, by delays in court proceedings, or the closure of public parks and monuments. We judge these costs to be negligible so far. For a brief shutdown, such costs would arise very early in the first quarter and so likely would be made up within the quarter without much impact on first-quarter GDP growth. Of course, if the shutdown drags on, such disruptions and their costs will mount.

We do not expect to see an impact of the shutdown on the near-term pattern of nondefense purchases of intermediate goods and services or nondefense gross investment. BEA has little information on the precise timing of these outlays, and so usually spreads an annual estimate evenly over the year. In addition, Social Security and Medicare benefits will be paid on schedule, as these are funded out of trust fund monies that past legal judgments have decreed are not affected by the shutdown, and administrators of those payments are "essential".

Posted 09 January 2019 by Joel Prakken, Ph.D., Chief US Economist and co-head of US Economics, Macroeconomic Advisers by IHS Markit

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