Brian Moynihan warns economy risks ‘nausea’ from government shutdown as business slows and federal workers cut spending | Luck
When the government shutdown began, the consensus was that it would not be too damaging to the economy. Sure, certain datasets would be missing. And yes, there could be a slight dip in consumer spending in several regions due to federal workers not getting paid. But the economy would be reflected on a wider scale.
That certainty is now fading, with leading economic figures warning that the nearly month-long standoff is beginning to materially damage the outlook for American businesses and consumers.
Brian Moynihan, CEO of Bank of America, is one of the voices now warning that if the government shutdown drags on too long, there will be more serious economic consequences to bear.
“Shutting down the government and arguing about the budget and everything, that’s a political process, but if you look at it from an economic perspective, it’s ultimately going to slow down the economy,” Moynihan said. That’s because any activity that requires government approval — whether it’s SEC approvals for IPOs, job listings, government contracts, regulatory approvals, etc. — has stopped, Moynihan added, meaning private sector businesses are being negatively impacted.
“The idea is that it will have an effect,” he added. Moynihan noted that Bank of America and its related companies also bank 250,000 to 300,000 government employees, all of whom are now being offered services such as loan forbearance and fee waivers related to their salaries.
“This is a big problem and the industry is going to get stronger,” Moynihan added. “The question is, as it goes on, it’s going to affect more parts of the economy, because the activities that need approval, that need to get things done, they just can’t be done, so I just hope that it gets resolved. I always hope that it gets resolved because at the end of the day, there’s a lot of discussion that needs to happen about the fiscal situation of the United States. I think it’s better to have it around you and think about it with a clear head, without the pressure of it.”
Moynihan added that the spread of idleness could cause “malaise” throughout the economy: “If malaise develops and people slow their spending, that’s a problem. If employers start saying, ‘I’ve got to adjust headcount faster than I would otherwise,’ that’s a problem. That’s when the big problems will come.”
Confidence is also dented by the fact that promises that the shutdown will end soon have turned out to be empty. White House National Economic Council chief Kevin Hassett told CNBC on Monday, Oct. 20, that the lockdown will “probably” end sometime this week. At the time of writing, no deal has been made.
The impact is so far limited to Washington
Moody’s Analytics chief economist Mark Zandi points out that so far the government, the fallout from the shutdown has largely been limited to the D.C. area because of the impact on consumers. “This is unlikely to be the case for much longer,” he wrote in a note earlier this week.
In addition to the risks Moynihan pointed out (government contracts not being approved; consumers pulling back on spending), Zandi noted that at the most extreme end, financial markets may need to take notice: “While it’s hard to think, if the shutdown extends into the holiday shopping season and hurts retailers, that’s when financial markets will start to discount the impact on the economy and magnify the economic damage.”
He added that President Trump’s threat to furlough workers could hurt the outlook further: “I expect any cuts to be more powerful than actual, but even so, based on our macro model simulations, in a scenario where the shutdown lasts until the end of the year, a recession is more likely than not.”