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Government shutdown projected to cost American economy $3 billion

The Congressional Budget office says the United States economy has been slowed by its government shutdown and President Donald Trump's trade war with China. Bloomberg photo by Andrew Harrer.

WASHINGTON - The longest-ever government shutdown cost the American economy $11 billion, although about $8 billion in that will be made up in additional economic activity as back pay goes out to federal workers, the Congressional Budget Office said in a report on Monday.

The shutdown is projected to lower America's gross domestic product by $3 billion in the fourth quarter of 2018, as well as by $8 billion for the first quarter in 2019, the CBO said. But the economy will grow about $8 billion faster in the next two quarters than it would have without the shutdown, muting much of its long-term impact.

As a percentage of the overall economy, the impact of the shutdown is small - just 0.2 percent of GDP for the first quarter of 2019. But, the CBO notes, "Underlying those effects on the overall economy are much more significant effects on individual businesses and workers."

The direct impact of the five weeks of missed federal paychecks hits 2.2 million people, when considering spouses, children and others who live with the 800,000 unpaid federal workers and depend on their earnings, according to Washington Post estimates from census data.

The larger number includes 558,000 children under 18 and 103,000 people over age 65. About 333,000 are veterans, mostly from the Gulf War era, with more than a third of the veterans reporting a service-connected disability.

The slowdown in economic activity is the result of billions less in government spending and less spending by hundreds of thousands of government workers during the shutdown, CBO Director Keith Hall said.

"We think there will be a fairly quick recovery from that," Hall said. "But there is a permanent loss. You lose the government output for five weeks, and that's never made up."

The CBO also projected Monday that the American economy would grow by 2.3 percent in 2019, as the temporary boost from the Republican tax law and other new federal spending begins to fade.

The U.S. economy expanded by 3.1 percent in 2018, in part because of the tax cut and an increase in federal spending passed by Congress that year. But the impact of the tax cut will be more muted in 2019, according to the CBO, which also projected that gross domestic product will grow by an average of only 1.7 percent through 2023.

The report comes amid fears of a global economic slowdown, as well as ongoing trade tensions between the United States and China and the lingering impact of the longest government shutdown in American history.

U.S. stocks slipped Monday as bellwether Caterpillar kicked off a busy earnings week on a down note, missing profit expectations and adding to worries of a slowdown. The Dow Jones industrial average dropped more than 200 points, or 0.8 percent, on the news.

Caterpillar was also less optimistic for 2019 than analysts had assumed, a sign that it may see the global economy slowing. Caterpillar is the world's largest maker of earth-moving equipment and a harbinger of global economic health. Its products service a wide swath of industries, including road construction, petroleum, mining, logging and agriculture.

"Cat is a bellwether of global economic activity," said Ed Yardeni, president of Yardeni Research. "Its latest earnings report confirms lots of other indicators showing the global economy is slowing down."

Caterpillar's report launches the busiest week of the earnings season, with key players including Facebook, Amazon, Apple, Microsoft, McDonald's, Pfizer and others set to report earnings this week.

A healthy week could foretell less volatility in the stock market. Disappointing earnings are likely to lead to more fluctuation, similar to that seen in 2018.

The CBO projects the economy growing by 1.7 percent in 2020, the year of a presidential election.

"Growth in business fixed investment, which contributed almost one-third of the GDP growth in 2018, is expected to slow markedly this year as the effects of the 2017 tax act on investment moderate," the CBO report states.

Last year, the economy grew at an annualized rate of 4.1 percent from April to June in the fastest expansion since 2014. President Donald Trump celebrated the news as a victory for his administration's economic policies, though economists warned that the jump could prove to be a blip rather than a new normal.

New barriers between the United States and its trading partners are also expected to weigh down the overall economy modestly. These tariffs are projected to reduce GDP by 0.1 percent by 2022.

Trump's tariffs have raised steel prices for U.S. companies, but the president said in a tweet Monday that the tariffs have revived America's steel industry:

"Tariffs on the 'dumping' of Steel in the United States have totally revived our Steel Industry. New and expanded plants are happening all over the U.S. We have not only saved this important industry, but created many jobs. Also, billions paid to our treasury. A BIG WIN FOR U.S."

This article was written by Jeff Stein and Thomas Heath, reporters for The Washington Post.