Trump’s Plan to End Shutdown Rejected; GDP Could Lose as Much as Half Percentage Point

The Trump administration said that new estimates show the cost of the government shutdown will be twice as steep as originally forecast. The original estimate showed that the partial shutdown would subtract 0.1 percentage points from growth every two weeks. That estimate has now been doubled to a 0.1 percentage point subtraction every week.
James Hyerczyk
US Economy

President Trump’s “major announcement” came and went on Saturday with it likely to have little impact on the U.S. government shutdown which is now in its 29th day. After the announcement about 800,000 federal workers in nine agencies remained furloughed with some even working without a paycheck.

The “Major Announcement”… Immediately Rejected by Democrats

President Trump late Saturday afternoon proposed limited legal protections for undocumented immigrants in exchange for money to build his proposed border wall. Trump’s plan was to put pressure on congressional Democrats who stand in the way of him fulfilling a campaign promise to build a protective border wall.

In his short speech at the White House, Trump again pushed for $5.7 billion in U.S. funding to build “steel barriers in high-priority locations”. However, Trump’s proposal was quickly rebuked by Democrats, as well as conservatives leery of any deal that embraced “amnesty.” Even before Trump’s remarks, Democratic leaders rejected it as inadequate or even “unacceptable” as details emerged in media reports.

The Details

The President said he would back legislation to give more than 700,000 immigrants, known as “Dreamers,” temporary legal status and work authorization for three years if their protection gets revoked. He also supported a three-year extension of the legal status of immigrants temporarily protected from deportation.

Impact of Government Shutdown on the Economy

The partial government shutdown is now into its 29th day with no solution in sight. At this time, the focus has been on the 800,000 workers without pay, airport delays and unattended national parks. However, conditions are expected to worsen as the shutdown progresses. Ultimately, it will have a negative effect on U.S. Gross Domestic Product.

Starting on January 20, the impact on Americans will continue to grow. Americans who rely on food stamps may begin to feel the pinch. On January 25, the second round of missed paychecks will take place. Additionally, the Administrative Office of the U.S. Courts, which supports the federal court system, is set to run out of funds.

On January 28, the Internal Revenue Service will start accepting tax returns, however, the tens of thousands of furloughed workers will not get paid. On January 29, the President may or may not give the annual State of the Union address to Congress. On January 30, it is unclear whether the government can release the planned fourth-quarter and full-year 2018 gross domestic product report.

Last week, a Bureau of Economic Analysis official told CNBC that “there is no way for us to know until we get back and evaluate all the various data sources that go into advance estimate of GDP.” Furthermore, the shutdown has already delayed release of other key economic indicators, such as retail sales, housing starts and business inventories.

GDP Growth to Take Hit

Also last week, the Trump administration said that new estimates show the cost of the government shutdown will be twice as steep as originally forecast. The original estimate showed that the partial shutdown would subtract 0.1 percentage points from growth every two weeks. That estimate has now been doubled to a 0.1 percentage point subtraction every week.

A government official said that if the shutdown lasts the rest of this month, it could subtract a sizable half a percentage point from gross domestic product. Experts say that half of the expected 0.5 percentage point loss will be due to the lost hours of government workers, and the other half will come from the rest of the economy.

Problems could arise from slow growth combined with the waning effects of tax stimulus, trade tensions and the slowing global economy.

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