The Donald Trump administration now estimates that the cost of the government shutdown will be twice as steep as originally forecast. The original estimate that the partial shutdown would subtract 0.1 percentage point from growth every two weeks has now been doubled to a 0.1 percentage point subtraction every week, according to an official who asked not to be named.
The administration had initially counted just the impact from the 800,000 federal workers not receiving their paychecks. But they now believe the impact doubles, due to greater losses from private contractors also out of work and other government spending and functions that won’t occur.
If the shutdown lasts the rest of this month, it could subtract a sizable half a percentage point from gross domestic product, the official said.
The subtraction from growth would add to the troubles of an economy already thought to be slowing from waning effects of tax stimulus, trade tensions and gathering global weakness.
The administration’s estimate is more aggressive than some forecasts from Wall Street economists. Those estimates have centered around a 0.1 percentage point cut to growth every two weeks. They have been rising, however as it looked like the shutdown would drag on longer.
Mark Zandi, chief economist with Moody’s Analytics, forecasts a half of percentage point hit to GDP if the shutdown lasts through March, roughly a third of the administration’s new estimate.
“We estimate (the shutdown) will reduce first quarter real GDP growth by approximately 0.5 percentage points,” Zandi wrote in a research report. “Of this, about half will be due to the lost hours of government workers, and the other half to the hit to the rest of the economy.” Zandi said his estimate could worsen if the administration can’t continue to triage the effects of the shutdown or if the administration can’t issue tax refunds.
On the other hand, Ian Shepherdson, chief economist at Pantheon Macroeconomics, believes the combination of the shutdown and the tendency of the first quarter to be statistically weaker than the other three means growth could turn negative.
“If the shutdown were to last through the whole quarter, we would look for an outright decline in first quarter GDP,” Shepherdson wrote in a report.