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Although a deal was reached to re-open the Federal government, questions remain about the economic impact of the shutdown.

uncertainty in near term chart

The temporary closure of select parts of the Federal government ended on Friday, January 25. Still, questions remain about the impact of that shutdown on the economy and what it means for first quarter growth. The first official estimate for Q1 Gross Domestic Product won’t be released until late April, but the effects are already being felt in some data.

The effect is illustrated poignantly above. Unsurprisingly, the Economic Policy Uncertainty Index (which is constructed using data from various large newspapers, the Congressional Budget Office, and the Federal Reserve Bank of Philadelphia) spiked in tandem with the government shutdown. At the same time, the Conference Board’s Consumer Confidence Index experienced large declines in the past two months. In the accompanying press release, the shutdown was specifically noted as a partial cause identified by survey respondents, while also acknowledging that “shock events such as government shutdowns tend to have sharp, but temporary, impacts on consumer confidence.”

Some economists have estimated that the shutdown could trim growth in the first quarter by as much as 0.5%, due to the direct negative impact on furloughed workers, the secondary (but real) effect on consumer confidence, and the resulting combined impact on spending.

Even so, the economy itself appears to still be growing at a solid pace, sufficient to support strong job creation and a consumer sector that remains generally upbeat on the economy despite the short-term negative impact of the situation in Washington D.C. In short, the shutdown represented a headwind to the economy, but not one that was sufficient to knock it off course.

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