Independent, Fee-Only Financial Advisor
Thursday, February 07, 2019
Self-Inflicted Government Pain
This post was a collaboration between Nancy Anderson and Bella LaRosa!
Self-inflicting pain is never the route to go. It’s not good for personal growth and it’s certainly not good for economic growth. The US government has done this exact thing through the government shutdown.
The Congressional Budget Office released data on January 28, 2019 explaining how the government’s five-week shutdown affected the economy. It states, the shutdown “delayed approximately $18 billion in federal discretionary spending.” Paired with this, what began in the fourth quarter of 2018 as a $3 billion loss to GDP continued to injure us through the first quarter by $8 billion. This combines as a whopping total of an $11 billion loss to GDP, all self-inflicted. We expect to claw back some of these losses in the following quarters, but the CBO still expects $3 billion of the loss to be permanent.
Since December, consumer sentiment, which directly correlates with consumer spending, has decreased. Consumer sentiment, according to the University of Michigan, dropped from 98.3 in December to 91.2 in January. Consumers in the US feel less assured about the economy and, as a result, are less likely to spend money. In the 3rd quarter of 2018, consumer spending made up 68% of GDP, according to the Bureau of Economic Analysis. A decrease in consumer sentiment discourages consumers from spending, which then decrease GDP. While the government is reopened, it is temporary and leaves consumers with more uncertainty which leads to a decrease in spending which leads to a decrease in GDP. And round and round we go—more self-inflicted pain.
For investors, this unease is coupled with the concern of a decrease in overall global economic growth. According to the World Bank, China’s expected GDP will be drop to 6.2% in 2019. This would be the lowest since 1990 and is expected to stay stagnant at 6.2% growth till 2021 where it is predicted to drop to 6.0%. The article, “Eurozone Slowdown Feeds Fears About Faltering Global Growth,” (Hannon & Sylvers, WSJ) explains how the Eurozone grew at the lowest rate in 2018 in four years. Hannon and Sylvers point to Italy’s GDP receding for the second quarter in a row, indicating a recession. Furthermore, the article also states that the German government decreased their forecasted GDP growth from 1.8% to 1.0% for the first quarter of 2019. They attributed this to their increased “geopolitical and trade risks.”
All this to say, government shutdowns are like self-inflicting pain upon our GDP. They unnecessarily decrease our GDP through a decrease in spending. They decrease consumer confidence, and therefore hinder GDP more through consumer spending. With the overall world economy showing signs of slowing, it’s like shooting ourselves in the foot when we’re just dealing with an ingrown toenail.
Posted by Ryder Taff, CFA