A Deutsche Bank analysis suggests the government shutdown will start to reduce U.S. GDP at a rate of 0.2 percent per week after October 14. Assuming it were valid to extrapolate that over the entire fiscal year, that would turn into a decline of 5.1 percent — an ugly recession. A decline of 5 percent in one year seems a reasonable prediction to me based on everything that is involved.
If you can take House leaders at their word, the government shutdown will last for the entire fiscal year, so it’s only natural to try to estimate the consequences. And when you look at the scenarios, it makes sense that the United States’ credit rating would be reduced a few weeks from now. If a political group that represents the views of 3 to 4 percent of citizens has the clout to launch a recession on a whim or as a stunt, that’s an institutional risk that investors have to consider.
Recessions come about when different parts of a national economy are moving in different directions — and moving too fast to adjust to each other’s changes. When such a condition persists, eventually something has to break. Looking at the United States through a political lens, this condition is easy to see. Health policy is just one example: one group is now convinced that free health care for all is the answer, while another is even more convinced that it has become necessary to prevent most people from getting routine medical care. Views on everything from business organization to clothing style are equally divergent, and continue to move apart at an alarming rate. There is the risk of a recession as a consequence of this rapid divergence, and government policy is only one way such a recession could come about.