The China trade war seems to be costing both the U.S. and China, as trade wars do.  President Trump is probably correct that China is suffering more, but if you look at Apple's warning about diminishing iPhone sales, you see that punishing China has something of a boomerang effect for American multinationals.  Of course, anything that hurts Apple hurts the entire semiconductor supply chain, so there are far reaching consequences. Still, if Trump's argument is that China will eventually give because it's feeling more pain, then I think I can at least entertain the notion.

The problem is that while he's picking this fight, he's also delivering self-inflicted wounds to the U.S. economy by yanking pay from 800,000 workers.  David Kelly, the Chief Global Strategist for JP Morgan Funds puts this into context:

"If the shutdown were to continue for the entire first quarter, it would thus directly knock roughly 1.1% annualized from GDP and 2.1% annualized from wage income (assuming the hourly output and wages of the impacted federal are similar to those of the general workforce).  These effects would, of course be amplified by the multiplier effects of spending not done by these workers due to a lack of ready income and by all the federal contractors who are also not being paid."

Dang.  If the trade war with China moves us from around ~3% annualized to ~2% annualized and the shutdown costs us a little more than 1%, then we're growing more slowly than inflation and things could feel recessionary even if we don't technically have a recession (2 quarters of negative GDP growth.)

This doesn't leave a lot of cushion in the event of unanticipated shock such as natural disaster, political instability around the world or a debt shock emanating from a weak borrower economy from within the EU (Spain, Italy, Greece and Portugal remain shaky) or from something closer to home.  Quoting Kelly again:

"So far the damage has been relatively minor (from a macro perspective – obviously not for the people affected) with the shutdown of some national parks and a halt to the processing of many loans and permits.  The Treasury department claims that income tax refunds will be paid on time and TSA workers and air traffic controllers are still working, although not getting paid.  However, this could easily get out of hand as it is unclear how long these workers would or could continue to work without pay.  If income tax refunds were delayed the impact on consumer spending would be huge.  If TSA workers or air-traffic controllers stopped showing up on mass, the impact on the air traffic system and the U.S. economy could be even worse."

There's also a chance that Fitch will downgrade US Treasury debt, following the lead set by S&P back during the debt ceiling revolt of 2011.  The ratings agencies will downgrade your credit if your government seems dysfunctional.  It's hard to argue with that.

So far, I think the shutdown has been covered as an oddity or an expression of Trump's personality.  I'm not sure we're getting the full story on economic risk and since a lot of this stuff will only be reported on a trailing basis, even ending the shutdown now might have serious consequences in April.  I'm also still reading a lot of "don't worry, the workers get paid back when the government reopens."  Well, I guess that makes sense if people are paid back within the same billing cycle but if this stretches beyond a month, payments will be missed, personal credit will be impacted, fees and penalties will be assessed -- homes could even be lost.  So it's not as simple as "They didn't get paid in January but they'll consume more in February when they are made whole."  It may be too late to make people whole in February if the January drought forced any personal defaults.