February 2019 – Economics Observations
ClearView Economics, LLC
I’ll make two observations about the government shutdown.
First, what was the real cause of the shutdown? The true cause of the shutdown was the fact that Congress failed to complete a budget – by September 30 – before the new fiscal year began. Some areas of appropriations, like the defense budget, were in place as FY2019 began. Other areas of the budget, however, encompassing the 800,000 government workers, were not nailed down as the new fiscal year started. These areas were running on “automatic pilot,” in the form of a continuing resolution. Time ran out on the authority to spend without a budget deal in place. Obviously, one side wanted spending for “the wall” and the other side didn’t. On $4.1 trillion of annual government spending outlays, $5.7 billion of spending on some fashion of a border barrier is inconsequential.
My second observation regarding the government shutdown concerns its economic (i.e., GDP) impact. Various estimates were put forth: one-tenth of a percent off GDP growth for each week of the shutdown; two-tenths of a percent off GDP growth for each week of the shutdown; zero, or even negative growth for the first quarter.
I suspect the net impact for the quarter will be minimal. Here’s a fundamental reason why. “GDP” is a measure of final goods and services output. Many, if not most, government workers continued to show up for work in spite of not being paid. Hence, in these instances, output did not fall! In essence, government employees were working—producing goods and services—for zero pay. That will adversely affect average hourly earnings, but not output. Yes, unpaid workers probably cut their spending to the bone. But did private business cut their production commensurate with a government worker spending slowdown? Probably not much. Hence, private inventories built. But “inventories” are a part of GDP, too. And now, as paychecks are issued, with the government workers made whole, a mini-surge of spending could occur, reversing the rise of inventories.
I am not saying the impact was zero. Sure, some planes did not fly. Some permits and licenses were not issued. But these effects are probably small, and not permanent. Timing differences in spending and production may largely wash out as the first quarter fully unfolds. Also, keep in mind that in recent years, for some reasons, GDP growth for the Q1s has been unusually weak. And now we face about two months of much colder-than-normal weather. In the end it might prove to be next to impossible to disentangle the negative effects of the government shutdown, unresolved seasonal adjustment issues, and cold and snowy weather disruptions.
Worst charts: The business sales growth versus inventory growth indicator is transitioning to a negative configuration. (See Chart #3.) Decelerating manufacturing production growth and overall economic growth typically follows.
Best charts: With the decline of commodity prices, overall inflation has receded, taking the pressure off the Fed to raise short-term interest rates. (See Charts #9 and #10).