May 13, 2021

The closure of government in the US, a headache also for the economy | Economy

The closure of government in the US, a headache also for the economy | Economy

The political rage in Washington creates uncertainty and that feeds the fears for its impact on the economy, in a moment of tension in which currents that go in opposite directions begin to be observed. The partial closure of the United States Government, which enters its fourth week, could reverse the growth forecast for the first quarter and leave it to zero if it continues.

The projection that was given until now was a growth close to 2% between January and March. But the first quarter is the most vulnerable, because activity is slowed by seasonal factors such as disruption by snowfall and moderation of consumption after Christmas shopping. The effect of the Government's closure is limited in time and affects a quarter of the officials.

Standard & Poor's quantified the impact in 3,600 million dollars (3,100 million euros) in the first three weeks. The White House, on the other hand, calculates that equivalent to 0.1% of the gross domestic product per week. It duplicates it, in any case, with respect to the projection initially. The upward revision is mainly explained by the effect it has on government contractors.

If it reaches five weeks, the economy will lose 5,700 million. The figure that coincides with the funds requested by President Donald Trump for the construction of the wall with Mexico. It seems nothing compared to the 19 trillion dollars (about 16.7 million euros) in which the gross domestic product of the United States is quantified. "But it means a lot for employees trying to cover their expenses," they point out from S & P.

The current situation, in addition, is unprecedented and represents a headache in addition to the complications of commercial litigation, rising rates and the moderation of global growth. That could accelerate the arrival of the next recession, because it suddenly reduces the purchasing power of 800,000 people. As they warn from Jefferies, it has a negative multiplier effect.

Employment and investment

The cost is direct and indirect, explains S & P. Holidays are canceled to national parks, visits to museums and many monuments are closed. Added to this are small contractors who work for Uncle Sam. "Although in principle it should not affect the business plans of these companies," their economists point out, "it could lead them to reduce personnel and that will extend the damage."

Ed Bastian, the CEO of Delta, anticipates a loss of 25 million in revenue this month because fewer contractors and officials travel. Although the confrontation affects him more in aspects difficult to quantify, like the delays of the inspections on the part of the agency of the aviation for lack of personnel. The closing also has minimums to the stock market regulator, which will cause delays when processing the requests of companies that want to go public.

Far from the federal capital, farmers fear that they will not receive the aid to pay bills. The office that assists SMEs has paralyzed the granting of guaranteed loans, which leaves cash to companies that need to finance their operations or refinance debts. That, according to Moodys, can undermine confidence if the disruption is prolonged and entrepreneurs will be more cautious when contracting and investing.

The rating agency recalls that a year ago the US grew more than 4% in the third quarter thanks to the boost of fiscal stimuli. Now he does it at 2%, his potential level. "The margin between growing and contracting is very fine," he warns. If the litigation extends to February and March, that could cause a rise in unemployment. "Even being very low", they point out, "people will feel it and consider spending".

Negative feeling

The fear is that there will be a cascading effect. Jamie Dimon, CEO of JPMorgan Chase, usually has a very optimistic vision. But he gave voice to these fears by warning that the break can eat the growth at the start of the year if it lasts the entire quarter. The executive of the largest bank by assets of the country presides over the Business Roundtable, the main business lobby.

"It's self-inflicted damage," he criticizes, "it's not the way to do things." The fundamentals of the economy, he says, "are not bad". And like other bankers, they see nothing at this moment that indicates that they are moving towards recession. "Consumption is good, confidence is high and there are more people returning to the labor market," he explains. But the feeling generated by the litigation is negative and adds to the volatility.

Alexander Acosta, Secretary of Employment, admits that this situation causes "clearly damage to the economy". Although anticipates that as soon as it is resolved, "much will be reversed by itself." Moody's estimates that the government's closure will eat half a point of GDP in the third quarter. But even in the most pessimistic scenario of the derailed economy, they affirm that "it will recover again".

Paid vacations

"People will adapt," said Donald Trump. Kevin Hassett, president of the president's council of economic advisors, adds that it's like a paid vacation because that loss of wages is temporary and will recover. Michael Luca, of the Harvard Business School, considers that this statement is misleading, because the financial situation of those affected is very fragile.

Jerome Powell, president of the Federal Reserve, already warned that this situation affects personal finances and public services. Now it shows a more flexible tone, to adjust the strategy to the new reality. "We are in a place that we can be patient," he says, while ensuring that he will do what is necessary to sustain the expansion, which means that next week will leave things as they are.

The Minutes of the meeting It reveals that many participants were opposed to continue withdrawing monetary stimuli, because they see that downside risks to the economy intensified and consider that inflation gives margin. The volatility of the markets is also mentioned six times. As analysts say, the internal discussion shows that there are many questions to answer and that forces us to be cautious.


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