Impact of Partial Federal Shutdown on U.S. Economy is Limited: CBO and Syntrinsic Agreed

Posted by on 01/30/19 in America, Markets

On Jan. 28, 2019, The Congressional Budget Office (CBO) published The Budget and Economic Outlook: 2019 to 2029. The report summarizes its view on the economic effect of the partial federal shutdown. It also reviews long-term federal budget deficits and U.S. economic growth.

There has been quite a bit of media discussion about the findings, so we thought it might be helpful to clarify Syntrinsic’s opinions on the issues raised.

Syntrinsic finds the CBO’s long-term view corresponds closely to ours, as just published in our 2019 Capital Markets Forecast. In short, painful as the shutdown has been, the more serious issues lie in growing deficits and uncertainty about trade.

Impact of shutdown relatively small, from the bigger perspective

Individuals and business owners were absolutely hurt by the shutdown, emotionally, and financially. We know many of our clients worked overtime to support communities during the shutdown. That is very real. For the purposes of our clients’ portfolios, though, we look through a wider lens at the full economy. From that perspective, the shutdown –- assuming it is at a real end — is less concerning.

According to the CBO’s Director’s Statement on The Budget and Economic Outlook: 2019 to 2029, “the five-week shutdown delayed approximately $18 billion in federal discretionary spending…” and reduced real GDP by $11 billion. That’s a lot of money. However, it’s a small amount relative to the $20 trillion USD GDP. The level of real GDP in the first quarter of 2019 will only go down 0.2 percent, according to the CBO, and won’t be recovered.

Impact of debt and trade wars more significant for our outlook

Relatively, our deficit is more concerning. The amount of federal debt held by the public was equal to 78 percent of GDP at the end of 2018, according to the CBO, and is projected to rise to about 150 percent of GDP by 2049. As we noted in our 2019 Capital Markets Forecast, we continue to monitor national debt, believing it will become a headwind.

 

 

Meanwhile, shifts in U.S. tariff and trade policy make the revenue side of the equation unclear. It is uncertain what policy changes will be kept, reversed, or revised; the CBO report explores several scenarios. Like the CBO, we feel that ambiguity around trade is creating obstacles to confidence and growth.

Despite these challenges, Syntrinsic’s sentiment remains Neutral towards the U.S. economy. Debt and trade woes are currently offset by positive factors like strong labor markets, high levels of consumer confidence, and strong balance sheets. Please view our 2019 Capital Market Forecast for our complete view on U.S. and global markets.