U.S. Government Shutdown Is Unlikely to Cause an Immediate Recession  

• Federal government shutdowns have become so common in recent years that forecasters have a good read on how another one would affect the American economy. The answer is fairly simple: The longer a shutdown lasts, the more damage it is likely to inflict.
• A brief shutdown would be unlikely to slow the economy significantly or push it into recession, economists on Wall Street and inside the Biden administration have concluded. That assessment is based in part on the evidence from prior episodes when Congress stopped funding many government operations.
• On the other hand, a prolonged shutdown could hurt growth and potentially President Biden’s re-election prospects. It would join a series of other factors that are expected to weigh on the economy in the final months of this year, including high interest rates, the restart of federal student loan payments next month and a potentially lengthy United Automobile Workers strike.
• A halt to federal government business would not just dent growth. It would further dampen the mood of consumers, whose confidence slumped in September for the second straight month amid rising gas prices. In the month that previous shutdowns began, the Conference Board’s measure of consumer confidence slid by an average of seven points, Goldman Sachs economists noted recently, although much of that decline reversed in the month after a reopening.
• Gregory Daco, the chief economist at EY-Parthenon, said a government shutdown would not be a “game changer in terms of the trajectory of the economy.” However, he added, “the fear is that, if it combines with other headwinds, it could become a significant drag on economic activity.”
• Goldman Sachs economists have estimated that a shutdown would reduce growth by about 0.2 percentage points for each week it lasted. That’s largely because most federal workers go unpaid during shutdowns, immediately pulling spending power out of the economy. However, the Goldman researchers expect growth to increase by the same amount in the quarter after the shutdown as federal work rebounds and furloughed employees receive back pay.
• The economy appears healthy enough to absorb a modest temporary hit. The consensus forecast from top economists is for growth to approach 3.0%, on an annualized basis, this quarter. Yet, economists expect growth to slow in the final months of the year, raising the risks of recession if a shutdown lasts several weeks.

(Source: The New York Times)