Tuesday’s federal government shutdown is the culmination of nearly two years of contentious debate over federal spending and entitlement programs that has yet to be resolved. The estimated economic effects of a short-term federal government shutdown on our current forecast, are estimated to be minor. Our expectation is that our fourth quarter GDP call would be reduced by 0.0-0.5 percent in the fourth quarter.
Today’s Fiscal Fights Rooted in the Budget Control Act After several days of contentious debate, today marks the first time the federal government has shutdown since the Clinton administration in late 1995. Today’s shutdown is the culmination of over two years of political turmoil in the wake of the Budget Control Act of 2011, which capped federal spending (sequestration) and brought to the forefront the need to reign in federal spending.
Since the implementation of the Budget Control Act in March, the federal deficit has come down However, as was pointed out by the Congressional Budget Office in their long-term budget outlook last month, federal fiscal policy is still on an unsustainable path.
The problem up to this point has been the way in which federal spending reductions have been applied. The current sequestration cuts result in reductions to federal operating budgets over the next several years but do little to address the long-term problem of rapidly expanding outlays due to the entitlement programs of Social Security and healthcare programs (middle graph). The fear among many members in the House is that, as pointed out by the CBO, the Affordable Care Act provides an expansion of healthcare coverage but at the cost of accelerating federal healthcare outlays.
This concern has led to the standoff now going on between the House and Senate over funding, not only the federal government, but the provisions of the Affordable Care Act. Meanwhile, the Senate and White House continue to maintain that funding the government and changing the Affordable Care Act is not an option.
Both parties agree that entitlement reform is needed, but they remain far apart on how to address these challenges. While the messaging has become clouded in recent weeks, the true political dynamic remains the issue of unaddressed entitlement reform that continues to create ongoing political gridlock in Washington.
Impact to Our Economic Outlook The estimated economic effects of a short-term federal government shutdown on our current forecast, are estimated to be minor. Our expectation is that our fourth quarter GDP call would be reduced by 0.0-0.5 percent in the fourth quarter. There would be negative effects on government spending and reduced consumption from the furloughed workers.
Historically, following a government shutdown, the federal government boosts consumption and federal workers payroll is restored. The primary reason for the minimal economic impact during this shutdown stems from the fact that most of the negative effects and the subsequent positive bounce back effects are currently expected to be contained within the same quarter of growth.Thus, on net, the overall hit to GDP is not as great as the 1995-1996 shutdown, which spanned two quarters.
Source: U.S. Dept. of the Treasury, CBO
Economics Group
John E. Silvia, Chief Economist john.silvia@wellsfargo.com 704-410-3275
Michael A. Brown, Economist michael.a.brown@wellsfargo.com 704-410-3278
