New York Times: Government Shutdown Unlikely to Lead to a Recession

A recession due to a potential government shutdown is unlikely, according to a New York Times report Wednesday.

Wall Street experts and sources in the administration of President Joe Biden told the Times that a “brief” shutdown, which could be possible if Congress can’t pass required spending bills by Saturday, is not likely to slow the economy, but there could be damage to economic growth if it drags on.

A shutdown would not be a “game changer in terms of the trajectory of the economy,” Gregory Daco, the chief economist at EY-Parthenon, said in the report. “The fear is that, if it combines with other headwinds, it could become a significant drag on economic activity.”

According to the report, a prolonged shutdown would not only put the brakes on growth, but also hurt Biden’s chance at reelection in 2024.

Some of the negative effects could combine with other factors like high interest rates, restarting student loan payments, and the United Auto Workers strike, to weigh down the economy at the end of the year, which is also the busiest period.

“Programmatic impacts from a shutdown would also cause unnecessary economic stress and losses that don’t always show up in GDP — from delaying Small Business Administration loans to eliminating Head Start slots for thousands of children with working parents to jeopardizing nutrition assistance for nearly 7 million mothers and children,” Jared Bernstein, the chairman of the White House Council of Economic Advisers told the Times. “It is irresponsible and reckless for a group of House Republicans to threaten a shutdown.”

Bernstein estimated GDP losses of 0.1 to 0.2 percentage points per week during a possible shutdown, compared to a Goldman Sachs analysis estimate of 0.2.

According to the Times, those estimates “track” with the loss of 0.13 percentage points per week during the 2019 shutdown during the administration of former President Donald Trump.

Despite the fears and potential for a loss in GDP, the experts say the economy is currently strong enough, heading to annual GDP growth of 3%, to withstand the hit without plunging the nation into a recession, the report said.

A shutdown could also spook investors, driving up the yield on Treasury bonds making it cost more to borrow money.

Some of the immediate impacts of a shutdown would likely cause Congress to come to agreement sooner rather than later.

“There’s a reason shutdowns tend to be pretty short,” Michael Linden, a former economic aide to Biden who is now a senior policy fellow at the Washington Center for Equitable Growth, told the Times. “They end up causing disruptions that people don’t like.”