From travel to IPOs, U.S. shutdown is straining its economy

As Trump-Congress showdown moves through week four, the economic slowdown is real

Delta Air Lines can’t get eight new aircraft in the air. Roughly a million government employees and contractors aren’t being paid. Some Americans who are trying to start small businesses face delays in obtaining the required tax ID number from the IRS.

As the partial government shutdown moves through its fourth week with no end in sight, the economic blow is being felt not only by federal workers but also by business people, households and travellers across the country. And while the hit to the overall economy so far remains slight, economists foresee real damage if the shutdown drags into February or beyond.

“Even if the shutdown is over by the end of the month, the hit to growth will be material,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a research note.

Shepherdson projects that after growing for nearly 10 years, the economy might even contract in this year’s first quarter if the shutdown lasts through March. Other forecasts are less dire. Mark Zandi, chief economist at Moody’s Analytics, thinks that if the shutdown extends that long, the economy would slow by 0.5 percentage points but would remain on solid footing.

On Tuesday, Kevin Hassett, a top economist in the White House, acknowledged that the shutdown was weighing on the economy more than he had previously estimated. Hassett, chairman of the Council of Economic Advisers, said the White House now calculates that annual growth is slowing by about 0.1 percentage points a week.

With the shutdown in its fourth week, that calculation would suggest that the economy has lost nearly a half-percentage point of annual growth so far, though some of that loss occurred at the end of last year and some in the first quarter of this year. Hassett said the economy should enjoy a boost whenever the government reopens.

Previous White House estimates of the impact didn’t fully take into account the effects on people who work for private companies that contract with the government to provide services, Hassett said.

The shutdown is rippling through the economy in ways that are not always visible, making it hard to fully assess its consequences. Complicating the task is that much of the economic data the government normally provides — from retail sales to home construction to the nation’s gross domestic product — has been suspended because the agencies that compile it remain closed.

With national parks shut down and some travellers suffering through long security lines and in some cases partial airport closures, for example, many Americans are having to decide whether to cancel travel and vacation plans.

“It is now plainly evident that the shutdown is affecting air travel, and when that happens, damage to the overall U.S. economy will shortly follow,” said Jonathan Grella, a spokesperson for the U.S. Travel Association, a trade group.

Some companies are pointing to specific problems: Delta said Tuesday that the shutdown is costing it $25 million (U.S.) a month in government travel. Its CEO, Edward Bastian, said that with the Federal Aviation Administration partially closed, Delta will also likely delay the start date of eight new aircraft.

The Securities and Exchange Commission, which oversees public stock offerings, is mostly closed because of the shutdown. As a result, some companies that had been planning initial public offerings in coming months, including Uber and Lyft, are likely facing delays. Marianne Lake, chief financial officer for JPMorgan Chase, said the bank could lose out on fees from IPOs and merger and acquisition deals that would be delayed if other shuttered agencies can’t approve them.

For small companies, too, the effects are increasingly being felt. Edward Farrer, an executive at Principal Manufacturing Corp., a manufacturer in Broadview, Ill., said that when the shutdown took effect, his company had nearly won approval for a request to the Commerce Department to import specialty steel from Europe free of U.S. tariffs. Commerce is among the now-closed government departments.

“We think we’d got it to the goal-line and were waiting for an approval, but everything is at an impasse because of the shutdown,” Farrer said.

Principal Manufacturing uses mainly U.S.-made steel in the parts it sells to automakers and other industrial companies.

But it imports some steel from Europe that is used to make a component for auto underbodies.

Last spring, it asked the Trump administration to exclude that steel from the 25 per cent tariffs the White House imposed on steel imports. Commerce was considering the request as part of a process the administration had established for companies that say they can’t obtain the steel they import from elsewhere.

For now, Farrer says Principal is paying the tariffs, which typically cost the company tens of thousands of dollars a month. It wants to keep doing the work, so it is eating the cost, Farrer said. “But we can’t do it forever.” Neil Bradley, chief policy officer at the U.S. Chamber of Commerce, said the chamber has heard from members that have been unable to obtain an employer identification number from the IRS. That number is needed to open bank accounts and file tax returns.

Eric Smith, an IRS spokesperson, said most U.S.-based businesses can obtain the numbers online, but paper applications aren’t being processed.

The most hard-hit by the shutdown, of course, are government workers themselves, who missed their first paycheques Friday, and contractors who work closely with the government.

Many have had to cut back on purchases, lowering overall consumer spending.