Estimated Macro Impacts of the Shutdown

Four business days into the shutdown, and we have already exceeded in length 90% of the government-wide shutdowns that have occurred. What is the macro impact? In an accounting sense, by end-of-Monday, the impact should be to shave off 0.2 ppts of 2013Q4 q/q annualized growth.

Exhibit 1 from Alec Phillips, “Updated Thoughts on the Federal Shutdown and Its Implications,” Goldman Sachs (10/2) [not online].
On the one hand, these estimates presuppose that when the closure ends, Federal pay expenditure on services is not disbursed retroactively.

On the other hand, no second round effects on consumption are incorporated — that is no multiplier for government consumption are assumed. And as we know, when we are in a liquidity trap, multipliers tend to be large. [1]

(Update 10/6) With the House legislation to retroactively repay furloughed workers, on top of DoD’s decision to bring back to work most civilian workers, the impact (in accounting terms) on nominal GDP is going to be minimized, although the impact on real GDP will remain. As GS notes, since furloughed workers will be paid for work not done (ironies, ironies), then the government spending deflator will be increased.

The GS note also mentions the impact of heightened policy uncertainty on growth. I myself am skeptical of the impact — I think deficient aggregate demand is much more important — but for those who think it is important, here is a picture of the current situation.

Updated Figure 1: Baker, Bloom and Davis Policy Uncertainty Index, monthly average of daily observations (blue), and observation for 10/6 (red square), and average of observations 10/1-10/6 (green triangle). NBER defined recession dates shaded gray. Source: Baker, Bloom, and Davis, accessed 10/6/2013, NBER, and author’s calculations.Update, 10/5, 10:30AM: It is important to recall why we have this continuing government shutdown. As noted in the Washington Examiner:

“We’re not going to be disrespected,” conservative Rep. Marlin Stutzman, R-Ind., added. “We have to get something out of this. And I don’t know what that even is.”

For Patrick R. Sullivan who does not seem to be familiar with the national income accounts of the United States, nor the NBER definitions of recessions and expansions, here is a graph of GDP data over the period around WW II.

This piece is cross-posted from Econbrowser with permission.