Worries grow about impact of a prolonged government shutdown

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.

On their first day in the majority, House Democrats on Thursday night passed a plan to re-open the government, but stands little chance of advancing because it contains no funding for President Donald Trump's promised border wall. The largely party-line votes came after Trump made a surprise appearance at the White House briefing room pledging to keep up the fight for his signature campaign promise.

"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.