The 20-day-old government shutdown has had a minor impact on the economy so far, but it could start to have a bigger sting if it continues for much longer and hits consumer or business sentiment, economists said.
As of Saturday, the shutdown will be the longest in the years since the Carter administration after it stretches beyond 21 days, and the economy will move into uncharted territory the longer it persists.
J.P. Morgan economists cut their first-quarter growth forecast by a quarter point to 2 percent because of the shutdown. Bank of America Merrill Lynch economists shaved 0.1 percentage point from fourth-quarter growth, bringing that forecast to 2.8 percent, due to the shutdown.
The economists from both firms said shutdowns typically result in a temporary hit of 0.1 to 0.2 percentage point for each week they continue, and BofA economists said their forecast for 2.2 percent first-quarter growth could be reduced if the government remains closed. J.P. Morgan economists said second-quarter growth could benefit as the economy comes back, if the shutdown ends in the first quarter.
“In addition to the direct drag to government consumption, we could see indirect effects from a temporary slowdown in consumption due to weaker spending from furloughed workers and delay in business investments from policy uncertainty,” the Bank of America economists wrote.
The shutdown would have a bigger impact if it continues past February, the economists said. So far, there appears to be no end in sight with President Donald Trump locked in a stalemate with Democrats over his demand for funding for a border wall.
The New York Times reported that as of this coming Saturday, the government shutdown would be the longest gap in federal funding in the past 43 years, surpassing a 21-day shutdown during the Clinton administration in 1995. The newspaper noted that before 1981, agencies were able to operate even in a funding lapse by cutting out nonessential operations.
“”If the shutdown continues into March, funding lapses for food stamps could materially impact personal consumption and the cumulative drag from the shutdown could meaningfully cut growth in 1Q, although some of it would be made up once the government reopens and back pay is released,” the BofA economists noted.
A lengthier shutdown would also be a concern to Federal Reserve Chairman Jerome Powell. He said Thursday that short shutdowns have limited impact on the economy, but there’s never been a very long one.
“A longer shutdown is something we haven’t had. If we have an extended shutdown, I do think that would show up in the data pretty clearly,” said Powell. Speaking at the Economic Club of Washington D.C., he said the Fed’s ability to track the economy is also impacted by the shutdown since critical reports like retail sales and GDP are produced by the Commerce Department.
Moody’s also weighed in, saying the risks increase if the shutdown is lengthy. “Additionally, a lingering shutdown would have a broad-based negative effect on the US economy and on US entities including regional governments, consumer-oriented companies and consumer asset-backed securities. The longer the shutdown lasts, the more it will also strain liquidity for defense services contractors and certain municipal bond issuers that rely on federal funding,” Moody’s analysts wrote.
The shutdown has impacted funding for nine federal agencies, which account for about $325 billion of federal spending, or 25 percent of congressional appropriations and 7 percent of total federal spending, notes Moody’s.
No pay tomorrow
So far, the shutdown has had minimal impact on unemployment claims, but the number of federal employees filing for benefits could jump significantly.
“Federal employees are supposed to get paid tomorrow for the pay period covering December 23-January 5. The 800k workers currently furloughed will obviously get nothing,” wrote Societe Generale economist Omair Sharif, in a note. “About 380k of those 800k are actually eligible to file a claim, so as it became clear during the week that there was no end to the shutdown, it wouldn’t be surprising if a number of them filed a claim this week.”
Sharif notes that unemployment data showed that a higher than normal 4,760 federal workers filed claims in the week of Dec. 29, but there didn’t appear to be an impact in the week ended Jan. 5, when claims fell by 17,000 to 216,000.
Sharif said he expects to see a “pop” in the unemployment filings, as there were 69,000 claims filed by federal workers in October 2013, during the first week of that shutdown.
There could be a further drag on the economy if there’s a drop in business or consumer sentiment, or if the shutdown starts to worry the stock market, the BofA economists noted.
So far, the stock market has not focused on the shutdown as an issue, but there’s been no precedent for a much longer shutdown and the market is already highly volatile.
“If it goes past the end of January, that could really impair confidence,” said Tony Roth, CIO at Wilmington Trust. He said consumers could be impacted if they are unable to get tax refunds, and businesses may be more reluctant to make capital expenditures.
Roth said in an interview that the shutdown, along with trade, is one of the major headwinds for the stock market.
The shutdown is beginning to filter into the stock market’s psyche. Stocks took a leg lower Thursday after Trump tweeted he would not go to the World Economic Forum in Davos, Switzerland, later in the month because of the shutdown.
Market pros took that as a sign that the shutdown could be extended. There had also been optimism that Trump could meet Chinese officials there and make progress on trade issues.
“I think it’s the fact that President Trump announced he’s not going to Davos. It’s just a reminder of how utterly dysfunctional the federal government is,” said Ward McCarthy, chief financial economist at Jefferies. “It just means it put potential progress on trade negotiations on the shelf, and the market didn’t like that.”
UBS says history shows there hasn’t been much impact on stocks from past shutdowns. “Markets have actually historically performed positively when the government has been shut down. The US government has shut down 14 times since 1980, yet the S&P 500 delivered positive returns two-thirds of those times, with an average return of 0.4%,” according to a UBS note.
U.S. credit rating
Moody’s said the shutdown is also negative for the U.S. sovereign debt but does not pose a credit rating risk.
Fitch, on the other hand, said the U.S. AAA rating is at risk. But economists do agree that the shutdown could spell trouble for Washington’s efforts to resolve the debt ceiling, a touchy topic for markets. Last February, Congress suspended the debt limit through March 1, allowing the government to borrow what it needs. UBS economists also said the debt ceiling debate could get more intense.
“The shutdown is indicative of the partisan nature of US politics, which doesn’t bode well for a constructive agreement on the debt ceiling. If the ceiling is reinstated on 1 March, without an improvement in the political climate, investor attention could gradually begin to shift toward the risk of a debt ceiling collision later in the year,” UBS economists wrote.
Goldman Sachs economists said, in a note, that the shutdown is minor drag but the “specter of a protracted debt ceiling fight later this year, which could have more substantial effects on financial conditions and growth.”
If the debt ceiling is reinstated, Treasury Secretary Steven Mnuchin would have to tap extraordinary measures to pay the government’s bills in order to stay under the statutory debt limit. That could keep the government from running out of money until August.The shutdown does not impact federal spending on things like Social Security, Medicare or Medicaid.