A month into US government shutdown, the economy blinks first

WASHINGTON (AFP) – After four weeks, the partial shutdown of the United States (US) government has begun to rattle the world’s largest economy, particularly hitting consumer sentiment, a mainstay of growth.

A closely-watched monthly consumer survey on Friday touched its lowest level since President Donald Trump’s election in 2016, suffering its biggest one-month drop in more than six years, according to University of Michigan economists.

Americans have less confidence in the economy’s strength in 2019, while 800,000 government workers are furloughed or work without pay as Trump battles on Democratic lawmakers over funding for a wall on the Mexican border.

The shutdown, which began on December 22 last year, directly affects only 0.5 per cent of the labour force, but indirectly, it is beginning to hit morale for more than half of US consumers, according to the report.

When government operations resume, federal workers should ordinarily get back pay. But this may not be true for contractors, who could have to eat the loss.

A US government employee talks on the phone as she looks out of a closed Smithsonian museum in Washington DC. – AFP

As the work stoppage continues, economists have progressively raised their estimates for its cost to GDP growth.

White House economists doubled their estimate early this week, determining that after a month, the shutdown would shave a half percentage point off the first quarter.

Influential central banker John Williams, president of the New York Federal Reserve Bank, upped the ante on Friday, saying the first quarter could lose a full percentage point.

“It is going to be a drag on consumer spending and the economy in the first quarter directly, enough to pull growth down by up to a half percentage, or maybe even a percentage point, if it continues,” he told a local banking conference, according to Bloomberg.

Nevertheless, Williams said there could be a post-shutdown rebound, as had been the case in the past.

The battle over wall funding coincides with other clouds on the horizon, as a recent Fed survey showed.

The US-China trade war, sharp volatility on stock markets that left the major Wall Street indices in correction for a month, and fumbled public statements from the central bank also made investors shudder.

With a slowing global economy and trade uncertainties, the Fed for now expects 2.3 per cent growth in 2019, down sharply from the growth of about three per cent expected for 2018.

Forecasts for the first quarter of this year are not yet available.

The fundamentals of the economy remain sound, analysts say, even if much economic data – including home and retail sales or the trade deficit – is not being produced during the shutdown.

Chief US economist at Oxford Economics Gregory Daco said in an analytical note on Friday that some were sure to claim the Michigan survey “signals an imminent recession.”

But he said the index had already been too high in recent months, meaning it was due to fall.

“Further, while growth in outlays will slow in 2019, a strong labour market, firming wage growth, lower prices at the pump and reduced mortgage rates remain supportive of momentum,” he wrote.

Williams of the New York Fed likewise said in a speech on Friday that the situation looked good.

“The economy is strong, the outlook is healthy, and my number one priority is using monetary policy to keep it that way,” he said in prepared remarks.