Despite the political outrages they incite, historical government shutdowns have often been insignificant events for both the economy and markets.
This situation, however, could be an exception.
This is due to President Donald Trump’s warning that he may make some federal furloughs from the shutdown permanent, potentially affecting an already shaky employment landscape.
If Trump acts on this warning — and manages to withstand what would likely be yet another legal challenge regarding his executive power — it complicates what have typically been more politically oriented rather than economically significant situations.
“We suspect this shutdown may not adhere to historical norms,” said Michael McLean, a senior analyst for public policy at Barclays, in a message to clients. If Trump proceeds, “this could mark a major shift from previous practices and might introduce new unpredictability into the economic consequences of a shutdown, which we would typically anticipate to be minimal.”
Indeed, previous shutdowns have left little impact except for the political repercussions suffered by the party deemed responsible.
While markets have dipped occasionally, they frequently bounced back swiftly. In terms of growth, economists estimate that the effect is roughly a 0.1 percentage point decrease in gross domestic product for each week. Given that the longest shutdown lasted 35 days, from late 2018 into the next January, this represents a minor effect for a $30 trillion economy. The immediate losses are generally recovered in the following quarters, as per Bank of America.
Challenges in the labor market
Nevertheless, in this instance, the labor market is already unstable. Specifically, the Washington, D.C. area, home to a significant portion of federal employees, has been affected by the layoffs earlier this year suggested by Elon Musk’s Department of Government Efficiency advisory committee.
Shutdowns inherently mean that employees classified as non-essential are furloughed, yet they are typically recalled once the deadlock concludes. Trump warned in a Sunday NBC News interview that “we are going to terminate a lot of the individuals that … we can eliminate on a permanent basis.”
The effect on the monthly nonfarm payrolls report wouldn’t manifest until the October numbers are published in November, where Trump’s threat “could exert a more significant immediate impact” than is usual, remarked Nomura economist David Seif.
However, this introduces an additional complication: if the shutdown endures for a considerable duration, it may postpone the release of crucial economic statistics.
Consequences for the BLS
The Labor Department announced on Friday that it will suspend nearly all operations. The department’s Bureau of Labor Statistics, which issues multiple important economic reports including the monthly jobs figures, will be closed for the duration of the shutdown. In a strategy document addressing the situation, the department cautioned about possible delays and mentioned that a “deterioration in data quality” could occur.
For Social Security beneficiaries, a delay in the consumer price index inflation report might affect cost-of-living adjustments.
The situation may also influence the Federal Reserve, which depends on BLS data for its decisions regarding interest rates and other monetary policy matters.
“While the US government may be on the brink of a shutdown, we foresee minimal economic effects,” stated Mark Cabana, head of rates strategy at Bank of America, in a note. “A shutdown would halt the release of economic data, leaving the Fed to rely on private data for its policy choices if the shutdown lingers.”
One related situation was the 2013 shutdown, during which the September jobs report was deferred until Oct. 22. That month’s CPI was also delayed by two weeks.
Elizabeth Renter, a senior economist at NerdWallet, agreed with most Wall Street assessments, suggesting the ultimate impact should be “fairly mild.” Nonetheless, she highlighted the potential repercussions for the labor market.
“The most immediate and significant effect is on furloughed federal workers and contractors,” she noted. “When families are compelled to live without income, even for a week, it can significantly undermine their financial stability.”
