When the government shutdown began, the general consensus was that it wouldn’t be too detrimental to the economy. Sure, certain data sets would be absent. And yes, there may be a mild downturn in consumer spending in a couple of regions due to federal workers not being paid. But the economy would bounce back more broadly.
That certainty is now fading, with leading economic figures warning that the near-month-long standoff is beginning to materially damage the prospects of America’s businesses and consumers.
Brian Moynihan, CEO of Bank of America, is one of the voices now warning that if the government shutdown drags on too much longer then more serious economic consequences will have to be endured.
“The government shutdown and arguing over the budget and everything, that is a political process, but if you look at it from an economic perspective, ultimately it’s going to slow down the economy,” Moynihan said. That’s because any activity which needs government sign off—be it approvals from the SEC for IPOs, jobs data, government contracting, regulatory approvals and so on—has ground to a halt, Moynihan added, meaning private sector businesses are being detrimentally impacted.
“The idea is that it will have an effect,” he added. Moynihan continued that Bank of America and its related companies also bank between 250,000 to 300,000 government employees, all of whom are now being offered services such as loan forbearance and fee forgiveness given issues related to their pay.
“That’s a big deal, and the industry steps up,” added Moynihan. “The question is that as it goes on longer, it affects more parts of the economy because activities that need approvals, need things getting done, just can’t get done, so I just hope they resolve it. I always hope they do because at the end of the day there’s a lot of discussion that has to take place about the fiscal situation of the United States, I think it’s better to have it with a clear head and you can sit down and think about it without the pressure of what’s going on around it.”
Moynihan added the spread of inactivity could cause “malaise” throughout the economy: “If a malaise develops and people slow down their spending, that’s an issue. If employers start to say: ‘I have to adjust my headcount faster than I’d otherwise adjust it,’ that’s an issue. That’s when the big issues will come.”
Confidence is also being marred by the fact that promises that the shutdown will end soon have proved empty. White House economic advisor Kevin Hassett told CNBC on Monday, October 20, that the lockdown was “likely” to end sometime that week. At the time of writing, no agreement has been made.
Impact limited to Washington so far
Moody’s Mark Zandi points out that so far, the fallout from the government shutdown has largely been limited to the D.C. area due to the impact on consumers. “This is unlikely to be the case for much longer,” the chief economist wrote in a note earlier this week.
As well as the risks highlighted by Moynihan (government contracts not being approved, consumers pulling back on spending), Zandi noted that at the most extreme end financial markets may have to take notice: “While difficult to contemplate, if the shutdown extends into the Christmas buying season, hurting retailers, that’s when financial markets will begin to discount the hit to the economy, magnifying the economic damage.”
He added President Trump’s threat to cut furloughed workers could also further damage the outlook: “I’m assuming that any cuts will be more performative than real, but even so, based on simulations of our macro model, in the scenario where the shutdown lasts through the end of the year, a recession is more likely than not.”
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