Five ways the shutdown is affecting the economy

16:27 | 14/01/2019 Cooperation

The partial government shutdown has injected a fresh dose of uncertainty into an increasingly complicated economic landscape for the U.S. 

Hundreds of thousands of federal employees, as well government contractors, face uncertain financial futures as the shutdown enters its fourth week with no end in sight.

About 800,000 workers missed their paychecks on Friday, putting a strain on household budgets and threatening obligations like mortgage payments and credit card bills.

But a prolonged shutdown also poses risks to U.S. companies that don’t deal directly with the federal government.

Here are five ways the shutdown is hindering the broader economy.

Weaker consumer and business sentiment

Businesses and communities that depend on consumer spending from the federal workforce are already feeling the pinch. Furloughed employees and sidelined government contractors are looking for alternative ways to pay their bills and curtailing discretionary purchases.

Consumer spending accounts for about 70 percent of the $20 trillion U.S. economy, and the White House Council of Economic Advisers (CEA) estimates that each week of the shutdown will cost $1.2 billion, or 0.3 percent of the economy.

But an extended shutdown could chip away at consumer and business sentiment that’s already been battered by the volatile stock market and trade battles, said Mark Hamrick, senior economic analyst for Bankrate.

“There’s a lot there that they just simply can’t count,” Hamrick said in an interview. “Whether it’s the White House or CEA or private economists, they can talk about how this amount of income wasn’t essentially available, but it’s very difficult to quantify the multiplier effects from that.”

Data freeze leaves economists in the dark

Policymakers and analysts are facing challenges assessing and responding to the shutdown.

Economists have been deprived of a massive trove of federal data that’s published on an almost-daily basis by the Commerce Department, one of the several wings of government closed during this shutdown.

The department collects and analyzes figures measuring gross domestic product, price increases, wage growth, retail sales and international trade metrics that economists, traders and policymakers rely on for their analyses.

Federal Reserve Chairman Jerome Powell said Thursday that a prolonged shutdown will hinder the U.S. economy, and that the central bank will “have a much less clear picture” of the harm since economic data is not available.

Stress on financial sector

Banks and credit unions are scrambling to help unpaid federal workers by deferring mortgage payments, offering free or low-cost loans and extending overdraft protections. Industry leaders say the financial sector can shoulder the burden for now, but lenders could face difficult choices if the shutdown rambles into February.

A prolonged shutdown could lead vulnerable federal workers toward foreclosures or costly debt cycles.

“I don’t even want to fathom that at this moment,” said Richard Hunt, president and CEO of the Consumer Bankers Association. “I still think the worst is yet to come.”

President Trump has indicated he will sign a bill passed by Congress that would grant back pay to federal workers affected by the shutdown. But that won’t kick in until the shutdown ends, leaving employees on the hook for major expenses incurred while funding talks continue.

Obstacles for businesses of all sizes

Businesses in major federal hubs are not the only ones harmed by the shutdown. Some smaller firms are struggling to stay afloat without promised loans from the Small Business Administration, which is closed during the funding impasse.

Meanwhile, larger corporations and startups are unable to file stock offerings and other mandated paperwork with the Securities and Exchange Commission (SEC) until the government fully reopens.

The SEC’s closure also leaves U.S. financial markets without their chief watchdog. While the agency can continue doing time-sensitive and emergency legal work, it’s unable to conduct most of its standard oversight during the shutdown.

More economic uncertainty amid global fears

While the U.S. continues to enjoy low unemployment, solid growth and meager inflation, analysts fear that an economic slowdown in China and emerging markets could weigh on the American economy.

The Trump administration faces several crucial economic challenges in March, including a self-imposed deadline to reach a trade deal with China and the re-imposition of the federal debt limit.

Fitch has threatened to downgrade the U.S.’s credit rating if the shutdown becomes intertwined with the debt-limit battle, though the Treasury Department can tap “extraordinary measures” to push the deadline until this summer if need be.

Theo Thehill