January 25, 2019
The federal government has been largely shut down for more than a month. But the stock market does not seem to have noticed. Nor has the bond market. Or currencies. Or commodities. The participants in these markets have shrugged off the shutdown because they correctly expect that it will eventually end, and government workers will go back to work. Thus far the impact on the economy seems relatively small.
We feel for the 800,000 government workers who are not getting paid. Their lives have been needlessly disrupted and we would certainly not like to be in their shoes. Our government hired them; it should pay them. But how big an impact will all of this have on the pace of economic activity?
We believe that the potential negative impact is grossly exaggerated. Kevin Hassett, chair of the Council of Economic Advisers, said that “If the prolonged partial government shutdown extends for the whole first quarter you could end up with a number very close to zero percent.” He went on to say that if the government reopened, “The second quarter number would be humongous. It would be like 4% or 5%.” Hasset is correct that first quarter growth will be biased downwards by the shutdown and that second quarter growth will rebound. But exactly how big will those distortions be?
One thing is clear. First quarter growth will not be even remotely close to 0%. Consider the following. There were 150 million workers on company payrolls in December. Of those roughly 22 million, or 15%, are government workers. But of that 22 million government workers 19.6 million were employed by state and local governments. Thus, there are only 2.8 million federal government workers. And of those federal workers only 0.8 million are not getting paid. We are talking 0.5% of American workers that were not paid in January. Admittedly, there are additional government contractors in the private sector that are also not getting paid. But any way we slice it, only a very small portion of American workers are being impacted. Even if the shutdown were to drag on first quarter GDP growth will not be 0%.
Let’s go back to the fourth quarter for a moment. The initial estimate of fourth quarter GDP growth has been delayed but is widely expected to be about 2.5%. So, at least through the fourth quarter the economy was on track despite the stock market selloff, weakness in China, Fed rate hikes, a slowdown in home sales, and the prospect of a government shutdown. And, judging by the 300+ increase in payroll employment for December, the quarter ended on a strong note.
We know virtually nothing yet about the first quarter. But we do know that initial unemployment claims (a measure of layoffs), declined to 199 thousand in the week of January 19 which is its lowest level in 50 years. Thus, it appears that first quarter growth is off to a good start and we expect payroll employment to continue rising at roughly a 200 thousand pace. If that is the case, a 0% GDP growth rate in the first quarter seems mathematically impossible. That is not to say that first quarter growth will be unaffected. We have trimmed our first quarter GDP forecast from 2.7% GDP growth to 2.0% even though we have virtually no data to support that revision. At the same time, we raised our second quarter growth rate to 3.1%.
We will have to wait and see how all this turns out. But first quarter GDP growth is not going to be 0%. The federal government portion of our economy is far too small for that to happen. Instead, we suggest that the impact of the shutdown may be far smaller than expected.
If that is right, then we have one other question. What were all those 800,000 workers doing in the first place? We are not going to dispute the need for air traffic controllers, TSA agents, law enforcement, food inspectors, and the Coast Guard. Their need has been well documented. But to have 800,000 government workers be unpaid for a month and have only a modest negative impact on GDP growth, suggests to us that, perhaps, many of those government jobs were unnecessary in the first place. We would hope that our leaders in Washington take this opportunity to re-examine which government services are truly critical and pare back government employment elsewhere. Nice thought, but we all know that is not going to happen.
Stephen Slifer
NumberNomics
Charleston, S.C.
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