Key Takeaways
- We estimate a U.S. government shutdown may cost real fourth-quarter GDP growth around $1.8 billion (annualized), or 0.11 percentage points, for every week the government is closed.
- The shutdown would add to fourth-quarter inflation, which is currently skyrocketing, giving the Federal Reserve another headache to contend with.
- Though risk of a shutdown is high, Congress may reach a new agreement on funding the government by the deadline. However, another short continuing-resolution reprieve only brings a possible shutdown fight closer to the debt ceiling debates, complicating what could already be an ugly fight.
- We believe Congress will raise or suspend the debt ceiling. Should a default occur, the resulting sudden, unplanned contraction of current spending would be staggering, devastating global markets and the economy.
Congress faces two enormous tasks over the next month: funding the U.S. government (or face a government shutdown) and increasing the debt ceiling. If no agreement is reached to fund the government by Dec. 3, the federal government will be closed until further notice. Even worse, Treasury Secretary Janet Yellen has warned that extraordinary measures to avoid broaching the debt limit are likely to run out by Dec. 15.
The shutdown, if it's brief, wouldn't be a disaster, but would still reduce some of the economic gains the U.S. has felt from the reopening and add more complications to a system already tangled up by supply-chain disruptions. S&P Global Economics estimates the U.S. government shutdown may cost fourth-quarter growth around $1.8 billion (annualized), or 0.11 percentage points, for every week the government is closed, on both direct and indirect costs.
While some indirect costs (such as canceled trips to closed national parks) may be regained once the government reopens, the productivity lost from direct costs (furloughed "nonessential" government workers) would reduce real GDP--since no "product" was created--and would never be regained. However, furloughed government employees do usually get paid (with taxpayer money, assuming Congress decides to compensate them afterward, as has been the case in the past). The shutdown would have no effect on nominal GDP and would, instead, add to fourth-quarter inflation. With inflation currently skyrocketing, the Federal Reserve would have another headache to contend with.
Turning the government off and on comes with a cost. Indeed, even the January "weekender" shutdown during former President Donald Trump's administration wasn't without costs. The most recent 35-day shutdown from fourth-quarter 2018 through first-quarter 2019 was so severe that it cut GDP by 0.1% and 0.2%, respectively, according to a January 2019 analysis from the nonpartisan Congressional Budget Office. Though risk of a shutdown is high, Congress may reach a new agreement on funding the government by the deadline. However, another short continuing-resolution reprieve, which kicks the shutdown can down the road a few feet, only brings a possible shutdown fight closer to the debt ceiling debates, complicating what could already be an ugly fight.
We believe Congress will raise or suspend the debt ceiling. A default by the U.S. government would be substantially worse than the collapse of Lehman Brothers in 2008, devastating global markets and the economy. Should a default occur, the resulting sudden, unplanned contraction of current spending would be staggering. The economy would fall back into a recession, wiping out much of the progress made by the recovery.
The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
This report does not constitute a rating action.
| U.S. Chief Economist: | Beth Ann Bovino, New York + 1 (212) 438 1652; bethann.bovino@spglobal.com |
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