The U.S. economy might not grow at all in the first three months of 2019 if the partial government shutdown goes on much longer, President Trump’s top economic adviser says.
Kevin Hassett said in an interview with CNN that gross domestic product in the first quarter could be “very close to zero” if the shutdown doesn’t end soon.
Hassett, chairman of the White House Council of Economic Advisers, has issued several warnings about the economy in a reversal from the earlier White House stance of saying it would have little effect.
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GDP is the official scorecard used to measure growth, but it’s affected by a number of variables that can make an economy look better or worse than it actually is. Government spending is one of those variables and a major component of the U.S. economy.
Economists estimate the shutdown subtracts a little more than 0.1 percentage point from GDP each week it continues. If the shutdown were to last till the end of the first quarter, it could shave 1.2 to 1.5 percentage points off first-quarter GDP.
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Macroeconomic Advisers, one of the premier GDP forecasting firms, estimates the economy is on track to expand at a 1.4% pace in the first quarter.
As Hassett pointed out, first-quarter GDP tends to be much weaker compared to the rest of the year. Since 2010, for example, first-quarter GDP has averaged 1.7% vs. 3% in the second quarter, 2.3% in the third quarter and 2.2% in the fourth quarter.
Economists say the gap stems mostly from the difficulty in measuring changes in the economy from the end of the holidays through the early part of winter — what is referred to as “residual seasonality.”
“It is true that if we get a typically weak first quarter and then have an extended shutdown, that we could end up with a number that’s very, very low,” Hassett said.
A low or even negative GDP number in the first quarter, however, has typically been followed by a surge in the second quarter.
In 2018, for example, GDP jumped to 4.2% after a 2.2% reading in the first quarter.
Hassett suggested the same thing is likely to happen this year. A lot of economic activity lost because of the shutdown in the first quarter, he suggested, could take place in the spring. For instance, the roughly 800,000 government workers who’ve missed several paychecks would likely spend more in the second quarter.
Yet some economists worry the damage from the shutdown could linger, especially if Democrats and President Trump hit an impasse on other critical issues such as the annual budget or increasing the legal limit on how much debt the government can issue — the so-called debt ceiling.
The debt ceiling has been a source of repeated conflict that’s disrupted the government and the economy.