Worries grow about impact of a prolonged government shutdown

A slowdown in government could shake confidence and cause businesses and consumers to stop spending.

By Martin Crutsinger / Associated Press

WASHINGTON — With President Donald Trump warning that it “could be a long time” before the partial shutdown of the government ends, concerns are rising about potential economic damage given that the shutdown is coinciding with other threats.

Most analysts don’t regard the shutdown alone as severe enough to imperil an economic expansion that has lasted nearly a decade. But should it drag into February, the slowdown in government activity could help shake confidence and cause businesses and consumers to stop spending.

“The shutdown is coming on top of lots of other problems — the trade war, the slump in the stock market, Brexit, Trump’s political problems,” said Mark Zandi, chief economist at Moody’s Analytics. “By itself, the shutdown may not be a big deal, but if you add it up and mix it with all this other noxious stuff, it could become a real problem.”

Though he still foresees only a minimal impact from the shutdown, Zandi said that “if the trade war isn’t settled soon, that will be a real problem, and if it conflates with a prolonged shutdown, that could be fodder for a recession.”

The shutdown has already suspended the government’s release of some economic data, making it harder to fully assess the state of the economy. And the risk is growing that tax refunds could be delayed if furloughed IRS workers aren’t around to process returns.

The shutdown, which began Dec. 22, will mark its two-week point on Friday, and Trump and Democrats in Congress remain far apart over Trump’s demand for funding for a wall along the Mexican border.

Economists at Macroeconomic Advisors have lowered their forecast for economic growth by a scant 0.1 percentage point for both the fourth quarter of 2018 and the first quarter of 2019 — to a solid 2.7 percent annual rate for the October-December quarter and a tepid 1.5 percent rate for the January-March period.

Analysts had already expected the economy to slow this year as a boost from tax cuts and increased government spending last year begins to wane. But the longer the shutdown persists, the more it could erode consumer and business confidence, compounding troubles for an economy that was already slowing.

If the shutdown lasts into February, Zandi said he would lower his growth forecast for the current quarter from a solid 2.6 percent to just above 2 percent, with further downgrades for each week the shutdown lasts beyond that point.

The Trump administration has sounded a more optimistic note about the shutdown’s impact while agreeing that the risks will grow the longer that 800,000 federal employees — roughly half of them working, for now, without pay — remain furloughed.

Kevin Hassett, chairman of the president’s Council of Economic Advisers, told reporters Thursday that he doesn’t foresee “big economic effects” from the shutdown, assuming it ends relatively soon. Congress has already signaled that it plans to follow past practice and eventually restore lost pay for all furloughed workers.

But some of the work that isn’t getting done is already having an effect in the financial sector. Employees at the Commerce Department, who produce a range of economic reports — from home sales and durable goods orders to trade deficits and the gross domestic product — have been furloughed. That means those economic reports aren’t coming out, making it harder for both private analysts and those at the Federal Reserve to evaluate the economy as it slows from last year’s stellar growth to more modest gains.

Even when the shutdown eventually ends, key economic reports will be further delayed as government statisticians try to process a backlog of data.

“Government workers will work overtime to catch up, but I worry about the quality of the reports, and that means they could be subject to bigger revisions that will make accurate forecasting harder to do,” said Sung Won Sohn, chief economist at SS Economics.

The effect of delayed government economic reports may not be as severe as during the previous prolonged shutdown in October 2013, when not only Commerce but also the Labor Department were shut down. This time, Labor, whose funding had already been approved by Congress, remains open and continues to produce such key reports as the monthly jobs numbers and inflation data.

Still, the concern is rising that the delay could last long enough to jeopardize the ability of the Internal Revenue Service to process tax refunds on a timely basis.

Some 52,000 IRS staffers — about 65 percent of the IRS workforce — have been furloughed just as the tax-filing season is getting underway. And this year, taxpayers and the IRS are facing the most sweeping overhaul of the U.S. tax code in three decades. The new tax law, which took effect a year ago, provides generous tax cuts for corporations and the wealthiest Americans and more modest reductions for middle- and low-income individuals and families.

To avoid lengthy delays in processing tax returns, the IRS may recall some employees to work, in accordance with its contingency plans. But refunds would still likely to be delayed if the shutdown persists because the funding for them wouldn’t be available. That would hurt retailers that rely on consumers who file their taxes early and spend their refund money in February or March. And any such pullback in spending would weigh on the overall economy.

Talk to us

More in Herald Business Journal

Members of Gravitics' team and U.S. Rep. Rick Larsen stand in front of a mockup of a space module interior on Thursday, August 17, 2023 at Gravitics' Marysville facility. Left to right: Mark Tiner, government affairs representative; Jiral Shah, business development; U.S. Rep. Rick Larsen; Mike DeRosa, marketing; Scott Macklin, lead engineer. (Gravitics.)
Marysville startup prepares for space — the financial frontier

Gravitics is building space station module prototypes to one day house space travelers and researchers.

Orca Mobility designer Mike Lowell, left, and CEO Bill Messing at their office on Wednesday, Aug. 16, 2023 in Granite Falls, Washington. (Olivia Vanni / The Herald)
Could a Granite Falls startup’s three-wheeler revolutionize delivery?

Orca Mobility’s battery-powered, three-wheel truck is built on a motorcycle frame. Now, they aim to make it self-driving.

Catherine Robinweiler leads the class during a lab session at Edmonds College on April 29, 2021. (Kevin Clark / The Herald)
Grant aids apprenticeship program in Mukilteo and elsewhere

A $5.6 million U.S. Department of Labor grant will boost apprenticeships for special education teachers and nurses.

Peoples Bank is placing piggy banks with $30 around Washington starting Aug. 1.
(Peoples Bank)
Peoples Bank grant program seeks proposals from nonprofits

Peoples Bank offers up to $35,000 in Impact Grants aimed at helping communities. Applications due Sept. 15.

Workers build the first all-electric commuter plane, the Eviation Alice, at Eviation's plant on Wednesday, Sept. 8, 2021 in Arlington, Washington.  (Andy Bronson / The Herald)
Arlington’s Eviation selects Seattle firm to configure production plane

TLG Aerospace chosen to configure Eviation Aircraft’s all-electric commuter plane for mass production.

Jim Simpson leans on Blue Ray III, one of his designs, in his shop on Friday, August 25, 2023, in Clinton, Washington. (Ryan Berry / The Herald)
Whidbey Island master mechanic building dream car from “Speed Racer”

Jim Simpson, 68, of Clinton, is using his knowledge of sports cars to assemble his own Mach Five.

Inside the new Boeing 737 simulator at Simulation Flight in Mukilteo, Washington on Wednesday, Sept. 20, 2023. (Annie Barker / The Herald)
New Boeing 737 simulator takes ‘flight’ in Mukilteo

Pilots can test their flying skills or up their game at Simulation Flight in Mukilteo.

An Amazon worker transfers and organizes items at the new PAE2 Amazon Fulfillment Center on Thursday, Sept. 14, 2023, in Arlington, Washington. (Ryan Berry / The Herald)
Amazon cuts ribbon on colossal $355M fulfillment center in Arlington

At 2.8 million square feet, the facility is the largest of its kind in Washington. It can hold 40 million “units” of inventory.

A computer rendering of the North Creek Commerce Center industrial park in development at 18712 Bothell-Everett Highway. (Kidder Mathews)
Developer breaks ground on new Bothell industrial park

The North Creek Commerce Center on Bothell Everett Highway will provide warehouse and office space in three buildings.

Dan Bates / The Herald
Funko president, Brian Mariotti is excited about the growth that has led his company to need a 62,000 square foot facility in Lynnwood.
Photo Taken: 102312
Former Funko CEO resigns from the Everett company

Brian Mariotti resigned Sept. 1, six weeks after announcing he was taking a six-month sabbatical from the company.

Cash is used for a purchase at Molly Moon's Ice Cream in Edmonds, Washington on Wednesday, Aug. 30, 2023. (Annie Barker / The Herald)
Paper or plastic? Snohomish County may require businesses to take cash

County Council member Nate Nehring proposed an ordinance to ban cashless sales under $200. He hopes cities will follow suit.

A crowd begins to form before a large reception for the opening of Fisherman Jack’s at the Port of Everett on Wednesday, August 30, 2023, in Everett, Washington. (Ryan Berry / The Herald)
Seafood with a view: Fisherman Jack’s opens at Port of Everett

“The port is booming!” The new restaurant is the first to open on “restaurant row” at the port’s Waterfront Place.