How Much Did the Shutdown Cost the Economy?

The economic costs of the partial shutdown of the U.S. government for 35 days probably won’t be known for weeks, if ever, because of the difficulty in measuring activity that didn’t take place as a result.

Suffice it to say the shutdown cost the economy billions of dollars in direct and indirect costs and more than the $5.7 billion that the Trump White House had demanded for a border wall with Mexico.

The Congressional Budget Office estimates that the shutdown reduced fourth-quarter GDP by $3 billion, or about 0.1% of GDP, and first-quarter GDP by $8 billion, equal to about 0.2% of GDP, for a total loss of $11 billion. The effect on the annualized growth rate of both quarters will be even larger, according to the CBO.

S&P Global Ratings estimates the 35-day shutdown cost the economy at least $6 billion in direct and indirect costs, including lost productivity from furloughed government workers and contract workers (direct cost) and lost economic activity from outside businesses (indirect costs).

“With a five-week closure we suspect that more of the economic activity indirectly tied to the government may have been outright canceled,” according to S&P Global Ratings, which characterized the longest shutdown in U.S. history as a “nasty flu that had begun to spread across the states.”

The shutdown ended Friday when President Donald Trump agreed to legislation that reopened the government for three weeks, giving Congress a window to develop a deal to fund the Department of Homeland Security and address security at the U.S.-Mexican border.

Trump, however, continues to insist that any deal include funding for a wall along the Mexican border, and he threatens to shut down the government again or possibly declare a national emergency in order to build a wall if it doesn’t. Another partial shutdown is “certainly an option,” Trump told The Wall Street Journal.

“Although this funding battle has ended, the next one starts in a few weeks, which may reduce growth expectations if businesses and financial markets begin to expect that Congress and the president will repeat the experience again and again,” according to S&P analysts.

Longer term, the shutdown may hurt morale and productivity of government workers who were required to work without pay and “create a challenge for government agencies and contractors” to hire and rehire workers,” according to S&P. “The next time the government decides to close (which is all too frequent), these workers may decide to opt for a job in another industry that they feel has more job security.”

Fears of another shutdown underlie a warning by Keith Hall, CEO of the National Association of the Self-Employed (NASE), that small-business owners “should brace themselves for a tax season filled with frustrations and delays … The government shutdown has created an additional level of uncertainty for small-business owners at the worst possible time,” said Hall, in a statement.

Another shutdown would not only be “a risk to GDP growth in the first half of the year” but also a possible precursor to a “showdown on the debt ceiling,” which will be reached after March 1, according to Tony Roth, chief investment officer of Wilmington Trust. “A breach of the debt ceiling would be a profoundly damaging event, so the machinations of debate around it will move markets along the way,” writes Roth in a market note.