Fed’s Powell Says Shutdown Hasn’t Hurt Economy, Warns Long Layoff Could Do Damage

January 10, 2019 Updated: January 10, 2019

WASHINGTON—The economic impact of the partial government shutdown is negligible, however, an extended shutdown could be a drag on the economy, Federal Reserve Chairman Jerome Powell warned.

Speaking at the Economic Club of Washington on Jan. 10, Powell said that past government shutdowns didn’t last long and, hence, hadn’t left a mark on the economy.

“A longer shutdown is something we have not had,” he said. “If we have an extended shutdown, I do think that it would show up in the data pretty clearly.”

Powell also said that the central bank would have limited data available to make predictions on the economy. He mentioned the U.S. Department of Commerce, specifically, as being restricted in publishing this month’s data on gross domestic product (GDP) and retail sales, for example.

The Census Bureau and Bureau of Economic Analysis are the divisions of the Commerce Department and have been affected by the government shutdown.

“Some of the important data we get is published by them [and] will not be published,” Powell said.

“We would have a less-clear picture into the economy if it were to go on much longer,” he added.

The federal government has partially shut down after Congress failed to pass legislation to temporarily extend funding. The shutdown stretched into its third week after congressional Democrats and President Donald Trump failed to reach an agreement over funding for a wall at the southern border. About a quarter of the federal government and 800,000 employees have been affected by the shutdown since Dec. 22.

U.S. employment numbers could face a headwind this month, according to Kevin Hassett, chairman of the White House Council of Economic Advisers. That’s mainly because government employees who have been furloughed because of the shutdown are considered unemployed during that period.

“So when we see the January jobs number, it could be a big negative,” Hassett told reporters Jan. 3. But those workers will ultimately get paid, he added.

Effect on the Economy

It’s unclear how long the shutdown might last. According to Goldman Sachs analysts, the ongoing shutdown will affect GDP by about 0.07 percentage point each week.

“We do not expect the partial shutdown to have substantial effects on financial markets. We note that the shutdown is unrelated to the debt limit and has no implications for Treasury financing,” a Goldman Sachs report said.

Economists from the country’s leading banks echoed the Fed chairman, stating that the shutdown so far had a minor impact on the economy.

“It’s very difficult to put a number on,” said Robert Dye, chairman of the economic advisory committee of the American Bankers Association, on Jan 9.

“The shutdown that we’ve had so far—particularly because it was over the holidays—is a fairly minor drag on the overall economy,” he said, adding that if it were to extend into another paycheck or two, it would exert a “meaningful drag” on the economy, Dye said.

He and other economists estimate that the shutdown so far may cut about 0.1 percentage point from GDP and will go higher if the shutdown lasts longer.

The economists expect to see a big pullback in spending if government employees can’t receive their paychecks.

Despite the uncertainty surrounding the government shutdown, the central bank doesn’t expect a recession in 2019.

“I don’t see a recession,” Powell said at the Economic Club. The two key risk factors for recession, which are inflationary overheating and asset bubbles, don’t exist, he explained.

“The principal worry I would have is global growth,” he said. “It’s a tightly integrated global economy and financial markets and we will feel that.”

Follow Emel on Twitter: @mlakan
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