Democrats and Republicans have not yet come to an agreement to end the shutdown, which has been paralyzing the federal administrations for four weeks. The new Democratic majority in the House of Representatives is confronted with a big issue: resolving the dispute with Donald Trump over the financing of the wall that he wants to build on the border with Mexico. This has caused the shutdown of a quarter of the federal government since December 22, 2018, freezing the salaries of more than 800,000 civil servants due to a lack of budget.

Until the two parties agree, funding for 25% of federal departments and administrations will remain suspended. However, Democrats and Republicans appear firmly committed to their positions, each rejecting the blame on the other party. The Republican President is demanding 5.7 billion dollars for the construction of a wall to block the entry of illegal immigrants to the border with Mexico. Democrats refuse to finance it, but propose funds for other border security measures. And the prospect of a deal looks rather remote, since President Trump is refusing to back and Democrat House leader Nancy Pelosi has labelled the wall “immoral”.
 

Broad economic consequences

As the partial federal government shutdown continues, it is starting to take a toll on the economy. In a new report, ING highlights the many implications for the US economy. “The 800,000 workers represent just 0.5% of the total 150.3 million people on the US non-farm payrolls. While they will cut back on their spending, the magnitude may not be huge.” Once previous shutdowns ended the workers all received back-pay, and ING’s case is that the same will apply this time around, and that spending should quickly recover.

However, the shutdown led to the closure of several museums and national parks, which is hurting tourism and the companies that operate around them. The Department of Commerce, the Department of Housing and Urban Development, the Department of Transportation and the Department of the Treasury are “severely impacted”, which means a delay in new business permits, processing of federal loans for things such as home purchases and visa applications. “This will stifle business activity and weaken economic growth at the margin.”

ING sees another consequence: government agencies, including the Securities and Exchange Commission and the Federal Trade Commission, are impacted. "This means that IPOs could be delayed with corporate deal-making broadly hit."

In addition, the Inland Revenue Service is also being affected, “so if the shutdown continues there are concerns that federal income tax refunds will be delayed given around 90% of the agency’s workers have been furloughed. This means the seasonal cash flow boost – the 2018 average was $2899 according to the IRS – may not come until later in the year, which will likely hurt spending and sentiment in the near term.”

But there’s more : with statisticians not collecting data, it means the figures for December 2018 and January 2019 may be viewed with scepticism when they are eventually published. Not to mention the risk of walkout and disruption at airports and crime agencies as staff seek paid employment elsewhere.

GDP growth could stand below 2%

All these consequences are likely to affect GDP growth in the first quarter, according to the bank, which cites data from the Bureau of Economic Analysis, which estimates the 2013 government shutdown reduced GDP growth by 0.3 percentage points because of the reduction in hours worked by federal. “We suspect that the longer the current shutdown lasts the greater the impact on confidence and spending. Given the lack of clarity on the likely duration of the shutdown, we are tentatively forecasting 1Q GDP growth of 1.7% annualised.”

And with the lack of published data, it might be more difficult for the Fed to follow what is happening in the economy. ING says that it had already scaled back its expectations for Federal Reserve rate hikes this year to two 25bp moves versus the four seen in 2018. “The additional headwind of the government shutdown coupled with fears that the lack of bi-partisanship in Washington will lead to more political stand-offs suggests growth risks are moving to the downside. This further reinforces our view that the Federal Reserve will not raise interest rates in the current quarter.”