A decrease in spending by American citizens could be the catalyst for a new recession, and with the financial uncertainty of the government shutdown persisting, experts fear a financial crisis could be on the horizon.
A newly-published study in the Journal of Applied Business and Economics details that a reduction in spending could negatively affect the United States’ Gross Domestic Product (GDP), 70 percent of which is made up of consumer consumption.
The Money Anxiety Index used in the study was developed by one of the reports co-authors Dan Geller and objectively reflects money confidence by looking at people’s actual financial decisions rather than their answers to a poll.
At the beginning of the government shutdown in December 2018, the Money Anxiety Index increased by 2.2 index points to 45.4, and has since remained the same. Broadly, the index saw a steady decline since its peak in June 2011 at 100.5 points, but experts are concerned the government shutdown may reverse this trend.
Geller, a behavioral economist working for the research firm Analyticom, and Professor Nahum Biger of the University of Haifa write that:
“A mere 5 percent reduction in consumption translates into 3.5 percent of the GDP. Therefore, even if the U.S. economy grows at an annualized rate of 2.5 percent, the 3.5 percent reduction in GDP resulting from reduction in consumption will push the U.S. economy into negative territory – i.e. recession.”
Why This Matters
The situation creates a nationwide trend in the reduction of consumer consumption, drastically affecting economic development and dampening previous administration accomplishment claims in unemployment and stock market rates.
Hundreds of thousands of federal employees will be financially affected in the long-term given the length of the shutdown. With no paycheck in sight, more and more are turning to food banks and food pantries to feed their families while employers threaten firings if employees do not work without pay.
The chairman of the White House Council of Economic Advisers Kevin Hassett has estimated that the shutdown will cut U.S. economic output by about 0.13 percent each week it persists, double the original estimate. New York Federal Reserve president John Williams predicts first-quarter economic growth to be cut by 0.5 percentage points, or 1 percent if it persists.
Major business and airlines are among those most economically affected, with airline ticket sales decreasing while airports suffer from unpaid TSA workers calling off work in record numbers, according to a report from the Wall Street Journal.
Nearly 14 months before the Great Recession, the Money Anxiety Index showed how money anxiety was trending upwards leading to its official start in December of 2007. The increase on the index resulting from the Government shutdown is a great cause of concern as it continues into day 32.
What’s Next
With no discernable end to the shutdown, it remains unclear the extent to which the long and short term consequences will affect the U.S. economy.
“We view the economy as a solid and stable economic block, but in reality, it is just a collection of millions of individual minds making consumption decisions based on their level of confidence that tomorrow will be a better day,” Geller said.
“The cycle of economic uncertainty, which increases money anxiety and thus lowers consumption is a self-fulfilling prophecy for a recession.”
President Donald Trump has stated that he is willing to allow the shutdown to persist for months or even years, but the validity of this statement will be challenged as citizens, his voter base and his party members grow concerned with the consequences.
More on the Subject
Earlier this month, federal employees demanded that President Trump and Congress “stop playing chicken with our lives,” warning that thousands of workers caught up in a U.S. government shutdown are struggling to make ends meet.
Many workers are living “paycheck to paycheck” but are embarrassed to admit it, said Holly Salamido, an employee at the Department of Housing and Urban Development and a leader in the American Federation of Government Employees (AFGE).
They are missing car payments, risking having their children removed from daycare, and are facing eviction, all events that can hurt a person’s credit rating, which creates lasting financial problems.