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Government shutdown: Trump, Democrats standoff damaging US economy

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We’re 26 days into the record-breaking government shutdown and while most economists agree that it will weigh on US economic growth, the chorus of warnings about doomsday scenarios is getting louder.

Most government shutdowns typically last a few days or a couple of weeks, but the current fight between President Donald Trump and Democrats appears to be set to continue for much longer. According to economists, the negative impact from 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 impact 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, the warning about the shutdown are only getting louder:

  • Bank of America Merrill Lynch reiterated their concern about the economic cost of the shutdown on Wednesday. “It [the shutdown] definitely becomes a significant shock if it lasts for months rather than weeks,” Ethan Harris, head of global economics research at Bank of America Merrill Lynch, told the Financial Times. “There is a sensitivity in the markets to signs of dysfunction in Washington.”
  • Standard & Poor’s pointed out that the cost of the shutdown will soon outpace the Trump’s $5 billion demand for a wall.
  • The White House even increased their own internal estimate of the GDP hit. A White House official confirmed to Business Insider that the Trump administration’s own model estimated that the shutdown would shave off 0.13 percentage points from GDP for every week of the shutdown. This is higher than the 0.08 percentage points originally assumed.
  • JPMorgan CEO Jamie Dimon said Tuesday that the shutdown is a serious problem for the US economy and cited research that showed US GDP growth could go to zero if the shutdown continued.
  • Pantheon Macroeconomics’ Ian Shepherdson was even more bearish, warning that if the shutdown lasts through March, then the US’ first-quarter GDP could be negative.
  • BAML’s own figures actually suggest that for each week the government is shutdown, US GDP growth is cut by 0.05%. This is half the economic impact of the 2013 shutdown because the current shutdown only affects 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 impacts 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’ 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 Standard & Poor’s said last week. “The longer this shutdown drags on, the more collateral damage the economy will suffer.”

There are a variety of reasons for the shutdown slowdown. For instance, figures from 2013 suggest federal workers spent 10-15% less during the time they went unpaid, reducing consumer spending.

The shutdown also exacerbates worried about the future, 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 believe that the historic dysfunction over the shutdown sets a nasty precedent for the debt ceiling fight. Without an increase in the ceiling the US could default on some of its debt, a 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, Global Macro Strategist at VTB Capital.

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