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Jan 24, 2019

Analysis | The Finance 202: Economists worry 'zero growth' may be reality as shutdown drags on

By Tory Newmyer


Kevin Hassett, chairman of the Council of Economic Advisers. (AP Photo/Evan Vucci)
The White House is bracing for an extended shutdown that does real economic damage.
Kevin Hassett, the Trump administration’s top economist, acknowledged yesterday the economy may not grow at all in the first quarter if the shutdown lasts that long. And White House acting chief of staff Mick Mulvaney is eyeing an even longer impasse. He has tasked agency heads with assessing which of their programs will be jeopardized if the situation continues into April. 
“Mulvaney wants the list no later than Friday … and it’s the firmest evidence to date that the White House is preparing for a lengthy funding lapse that could have snowballing consequences for the economy and government services,” my colleagues Damian Paletta and Juliet Eilperin report.
“The request is the first known inquiry from a top White House official seeking information about the spreading impact of the shutdown, which has entered its fifth week and is the longest in U.S. history. So far, top White House officials have been particularly focused on lengthening wait times at airport security, but not the sprawling interruption of programs elsewhere in the government.”
The shutdown probably has had a relatively small macroeconomic impact so far, independent economists tell me. Yet they agree the closure of key government agencies is approaching an inflection point, beyond which the pain will be more widely spread and tougher to measure.
“The economic impact of the shutdown is modest,” Ryan Sweet, director of real-time economics for Moody’s Analytics, tells me. “But we’re now getting into the period where the spillover effects are becoming more intense.” Lewis Alexander, chief U.S. economist for Nomura, agrees the shutdown is now “at a point where these effects could become nonlinear.”
This Friday, 800,000 federal workers will miss their second straight paycheck. A new study found the average furloughed worker has lost $5,600 in wages during the shutdown. “Collectively, these workers are owed $4.7 billion. The number will jump to $6 billion at the end of the week,” The Post’s Taylor Telford and Andrew Van Dam report. President Trump has signed legislation ensuring they will get back pay once the shutdown ends. That’s small comfort for those stretched so thin they need to line up for free food
And the shutdown appears to be weighing on consumer confidence more broadly, a real problem considering consumer spending constitutes more than two-thirds of economic activity. The University of Michigan consumer sentiment index just plunged to its lowest levels of the Trump presidency — a development economists agree is attributable at least in part to jitters over the shutdown. Business confidence is showing signs of softening, as well. 
Hassett, appearing on CNN, said even if the shutdown persists through March, the damage will be short-lived. He predicted a rapid rebound: “The second-quarter number would be humongous,” he said. 

Furloughed workers wait in line to receive food and supplies in Washington on Tuesday. (AP Photo/Andrew Harnik)
Other economists aren't as sanguine. While the economic hit from the furloughed workers alone is “fairly small," other problems could have a bigger impact.
 "What can become quite large is the knock-on effect of lost income from people working for the government in other capacities, like contractors, and damage to the efficiency of the system, including approval of permits and oversight of different sectors, which grows over time and compounds,” says Gregory Daco, head of U.S. economics at Oxford Economics. 
Housing assistance for low-income renters has been thrown into limbo; millions of families relying on food stamps could see benefits curtailed; rural home buyers can’t get loans backed by the Agriculture Department; neither can small-business owners, since the Small Business Administration is shuttered; tax refunds could be delayed as hundreds of Internal Revenue Service employees are skipping work because of financial hardship; and companies looking to go public can't, since most Securities and Exchange Commission employees have been furloughed. 
These sorts of “second-round effects” could flatten first-quarter economic growth “because creditors and suppliers of businesses hit by the shutdown will become less patient if it drags on,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a Wednesday note. “Federal employees will receive their back pay, but that doesn't mean that the businesses they patronize will be made whole by extra spending after the shutdown. In short, then, don't be deceived by benign payroll numbers for January; people and businesses are being hurt by the shutdown, and the pain will intensify.”
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— Trump blinks in SOTU staring contest with Pelosi. The Post's Seung Min Kim and Felicia Sonmez: "House Speaker Nancy Pelosi on Wednesday rescinded her invitation to [Trump] to deliver the State of the Union in the House next week — denying him a national platform for the annual speech in an extraordinary standoff between the two most powerful figures in the nation.  Late Wednesday, the president signaled a retreat from the standoff, announcing on Twitter that he will wait till the shutdown is over to deliver the address to Congress."
Here was Trump late last night: 
As the Shutdown was going on, Nancy Pelosi asked me to give the State of the Union Address. I agreed. She then changed her mind because of the Shutdown, suggesting a later date. This is her prerogative - I will do the Address when the Shutdown is over. I am not looking for an....
— Donald J. Trump (@realDonaldTrump) January 24, 2019
....alternative venue for the SOTU Address because there is no venue that can compete with the history, tradition and importance of the House Chamber. I look forward to giving a “great” State of the Union Address in the near future!
— Donald J. Trump (@realDonaldTrump) January 24, 2019
— House Democrats put an offer for more “border security" on the table to end the shutdown. But they won't support a wall. From The Post's Erica Werner, John Wagner and Mike DeBonis: “The proposal, which Democrats are drafting into a formal letter to Trump, will include border security improvements such as retrofitting ports of entry, new sensors and drones, more immigration judges and Border Patrol agents, and additional technology, among other measures.
The letter was not final, and the exact figure Democrats will suggest was not yet determined, but lawmakers and aides said it would be higher than the levels Democrats have supported in the past, which have ranged from $1.3 billion to $1.6 billion ... The development indicated a new desire on the part of House Democrats to discuss the types of border security measures they support, instead of just standing in opposition to Trump’s wall."
— Meanwhile ... the Senate is teeing up votes today on two different proposals to break the impasse: one including $5.7 billion for Trump's wall and another that would immediately reopen the government through Feb. 8. Neither of them are likely to succeed, as they both would need to secure 60 votes.
Here's a look at how the two proposals compare: 

—Federal workers staged a protest on the Hill. From The Post's Marissa J. Lang: The protest, led by union leaders from the National Federation of Federal Employees, was meant to draw attention to the plight of federal workers — many of whom have had to dig into their savings, take on side jobs and seek help from food banks and other charitable programs to stay afloat ... Twelve protesters  were arrested Wednesday.
Every minute, a bell chime signals another day of the shutdown, the longest in US history. Today is its 33rd day. #shutdownprotest
— Marissa J. Lang (@Marissa_Jae) January 23, 2019
— Mixed messages from some union members. The New York Times's Noam Scheiber and Natalie Kitroeff: “'There are some members at the Border Patrol that support the wall even if it means they have to go without pay, and we respect that,' said David Borer, the federation’s general counsel. 'But there are many thousands more government employees for whom the paycheck is the first and only issue' . . . At a time when 800,000 federal employees — largely unionized — are going without pay, they might be expected to speak with one voice. In fact, the stress of the situation is highlighting differences in both tactics and philosophy . . . Beyond being unable to strike, a vast majority of federal workers are forbidden to collectively bargain over wages and benefits, which are set by Congress. The unions that represent them bargain over work rules and working conditions — like safety measures or whether they can telecommute — and due-process rights for workers who have been disciplined or fired.”

The self-confident presidential adviser and son-in-law has prompted deep skepticism among many who doubt his political abilities and influence.
Josh Dawsey and Robert Costa

Treasury Secretary Steve Mnuchin has declined to appear before the House Ways and Means Committee on Thursday to testify on 36,000 Internal Revenue Service employees being called back to work without pay, a committee aide told CNN on Wednesday.

House Intelligence Committee Chairman Adam Schiff (D-Calif.). (AP Photo/J. Scott Applewhite)
Schiff, Waters plan joint probe of Deutsche Bank. Politico's Zachary Warmbrodt: "Two powerful House committee chairs are planning a joint investigation into German lending giant Deutsche Bank, which is under scrutiny from Democrats over its business dealings with [Trump]. House Intelligence Chairman Adam Schiff and Financial Services Chairwoman Maxine Waters coordinating oversight of the bank, which also faces questions about its role in money laundering schemes.
"The two California Democrats have been talking about areas of interest for each committee and where there's common ground, Schiff said in an interview... The investigation into Deutsche Bank will be one of the most closely watched probes launched by the new Democratic-controlled House because it could provide a glimpse into Trump's finances and ties abroad.
U.S. weighs oil sanctions on Venezuela. Reuters: "The Trump administration ratcheted up pressure on Venezuelan President Nicolas Maduro on Wednesday, signaling potential new sanctions against the country’s vital oil sector as it recognized Venezuela’s opposition leader as interim president. With street protests against Maduro under way across Venezuela, [Trump] said the United States recognized Juan Guaido, head of the opposition-controlled National Assembly congress, as the country’s leader and called socialist Maduro’s government 'illegitimate.' In response, Maduro said he was breaking diplomatic relations with the United States and giving U.S. embassy personnel 72 hours to leave Venezuela."
Shutdown threatens dollar, Treasuries. Bloomberg's  Emily Barrett and Misyrlena Egkolfopoulou: "The U.S. government shutdown risks putting a dent in both the dollar and Treasuries if it drags on. A quick resolution could do the same. A drawn-out spending battle may collide with the looming debate over America’s borrowing limit, potentially raising the odds of a U.S. credit rating downgrade, as occurred in 2011. But some observers reckon the market reaction this time around would be different: Instead of driving a haven trade into Treasuries, concerns about the U.S.’s growing debt burden could reverse that flow, pushing sovereign yields higher and the dollar lower… 
“‘The more this lingers on, the more that investors are losing patience with their dollar positions,’ said Mark McCormick, North American head of foreign-exchange strategy at TD Securities. ‘There’s risk of a downgrade, there’s room for people to cut exposure to U.S. Treasuries.’”
Global stocks rally on upbeat earnings. WSJ's David Hodari: "Global stocks mostly edged higher Thursday, as a relatively upbeat corporate earningsseason so far offset lingering concerns about the global economy. The Stoxx Europe 600 was up 0.4% in the opening minutes of trading. The tech sector was its sharpest gainer, climbing 1.6%, as semiconductor manufacturer STMicroelectronics rose 8.9% after releasing its earnings report... U.S. futures pointed to flat opens for the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite Index. Wednesday saw the weakest volumes on the New York Stock Exchange so far in 2019, with investors struggling to navigate a mix of economic and political forces.
CEOs bullish on U.S.-China trade deal. NYT's Emily Flitter and Jim Tankersley: "America’s corporate leaders are shrugging off a monthslong trade war, a protracted government shutdown and other looming economic threats, projecting that revenue growth in 2019 will be strong largely on the assumption that President Trump will reach a deal with China. They seem to be increasingly isolated in that view.
"In earnings calls and interviews, executives at some of the largest companies in the United States have played down what many economists and analysts see as possible obstacles to economic expansion both at home and abroad. In addition to the shutdown and the trade war, the challenges include recent signs of weakness in manufacturing data and slowing growth in China and Europe. Business leaders are instead expressing confidence that the Trump administration and Chinese officials will strike a trade agreement before midnight on March 2, when tariffs on Chinese imports are set to more than double, and keep the economy humming."
But some are worried China is winning the AI race. From The Post's Heather Long, reporting from Davos: "Top business leaders here at the World Economic Forum are monitoring China’s slowing economy, but they are eager to make another point: China has taken the lead on the artificial intelligence revolution. Blackstone chief executive Stephen Schwarzman, who travels frequently to Asia, said he sees an explosion of new AI businesses in China... There are concerns that the United States is falling behind, and executives might not even realize it.
U.S. says it doesn't need to prove Huawei threat. WSJ's Dustin Volz and Josh Chin: "The chairman of embattled telecom giant Huawei Technologies Co. is pushing back against claims his company conducts espionage for the Chinese government, contending that Huawei is being unfairly targeted without any proof... But the U.S. says that Huawei’s very structure, with its close ties to the Chinese government and role as a supplier of key hardware in telecommunications, makes the company a potential tool for espionage and thus a security threat, according to current and former U.S. security officials."
Universities dump Huawei gear under pressure from the Trump administration. Reuters: "Top U.S. universities are ditching telecom equipment made by Huawei Technologies and other Chinese companies to avoid losing federal funding under a new national security law backed by the Trump administration... The University of California at Berkeley has removed a Huawei video-conferencing system, a university official said, while the UC campus in Irvine is working to replace five pieces of Chinese-made audio-video equipment. Other schools, such as the University of Wisconsin, are in the process of reviewing their suppliers.
China resists global digital trade talks. Bloomberg's Bryce Baschuk and Shawn Donnan: "China risks being locked out of talks to establish new global rules to govern the $25 trillion e-commerce marketplace as the U.S. and other nations resist an effort by Beijing to curb the plan’s ambition, according to three people familiar with the discussions. Negotiations, which are set to be launched on Friday on the sidelines of the World Economic Forum’s annual meeting in Davos, seek to establish a baseline international regime for modern trade, reduce cross-border hurdles to e-commerce and cut costs, said the people, who asked not to be identified because talks are ongoing."
  • “Giuliani’s missteps frustrate Trump but underscore the unique role he plays for the president.” The Post’s Josh Dawsey

Japanese Prime Minister Shinzo Abe addresses the annual meeting of the World Economic Forum in Davos. (AP Photo/Markus Schreiber)
— Davos elites are focused on “defending the global order.” Per Bloomberg News's Shawn Donovan: “In speeches at the World Economic Forum’s annual meeting on Wednesday, German Chancellor Angela Merkel, Japanese Prime Minister Shinzo Abe and Chinese Vice President Wang Qishan offered full-throated — and by now largely familiar — defenses of globalization and multilateralism while calling for an end to the trade wars that President Donald Trump has launched.
  • Wang: 'Shifting blame for one’s own problems onto others will not resolve the problems,' Wang told delegates in an address that defended globalization as an 'inevitable’ trend and warned the international order was facing 'serious challenges' from 'unilateralism, protectionism and populism' . . . He didn’t mention either the U.S. or Trump by name, but left little doubt about his targets, at one point calling for a rejection of the 'practices of the strong bullying the weak and self-claimed supremacy.' 
  • Merkel:  'A global architecture will only work if we’re capable of compromise.' 
  • Abe: “I call on all of you, ladies and gentlemen, to rebuild trust toward the system for international trade.”
DAVOS SHOT: "Billionaires in Davos hate Alexandria Ocasio-Cortez’s 70% tax on the rich." The Post's Hamza Shaban
CHASER: "Billionaire Ken Griffin buys America’s most expensive home for $238 million.” WSJ's Katherine Clarke

The new layoffs show it's not getting any easier to keep media organizations afloat.

Chief Executive and Chairman Carlos Ghosn has resigned. Renault’s board is meeting Thursday to replace him, removing an obstacle to a sustainable relationship with Nissan.

Apple, Amazon, Facebook, Google and Microsoft spent a combined $64 million to shape U.S. regulation and stave off government scrutiny in 2018, according to ethics reports filed late Tuesday.
Tony Romm
From The Post's Tom Toles


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