Government Shutdown and Its Potential Impact on the Economy & Labor Market: Is This Time Different?

Is This Government Shutdown Different?

Government shutdowns typically trigger political storms, but historically, they've been non-events for markets and the economy. However, this time might be different. U.S. President Trump is threatening to turn government shutdown-induced furloughs of federal employees into permanent layoffs, potentially having a more lasting impact on an already shaky job situation.

If Trump follows through on this threat and successfully weathers what would almost certainly be another round of court challenges to his executive authority, it would create a major headache for government shutdowns, which have in the past been viewed as more political than economic events.

"We have reason to believe that this shutdown may not follow past precedents," Barclays senior public policy analyst Michael McLean said in a client note. Should Trump follow through on the threat, "it would be a material departure from past practice and could inject a new source of uncertainty into the economic effects of the shutdown, which we would otherwise expect to be small."

Historically Limited Impacts

Past government shutdowns have indeed left little imprint beyond political damage to whichever party was deemed at fault. Markets have occasionally sold off on the news, but quickly recovered thereafter.

On the growth front, most economists figure a shutdown shaves about 0.1 percentage point from U.S. gross domestic product (GDP) per week. Given that the longest shutdown lasted 35 days, from late 2018 into January of the following year, that’s not much for a $30 trillion economy. According to Bank of America, short-term losses are typically easily made up in subsequent quarters.

Labor Market Troubles

However, the current U.S. labor market is already wobbly. In particular, the Washington, D.C., area, home to a large number of federal employees, has been hit by job cuts advocated by Elon Musk’s Government Efficiency Advisory Council earlier this year.

A government shutdown generally means non-essential employees are furloughed, but they are recalled once the impasse ends. Trump threatened last Sunday in an interview that “We will be permanently cutting a lot of the people that we’re able to cut.”

Nomura Securities economist David Seif wrote that the impact on the monthly nonfarm payrolls report won’t be seen until the October data is released in November, at which point Trump’s threat “could have a more significant near-term impact than usual.”

Economic Data Delays

But this raises another problem: should the government shutdown last for a significant amount of time, it could delay the release of key economic data.

The Labor Department said last Friday it would shut down nearly all of its activities. The department’s Bureau of Labor Statistics (BLS) would be shuttered throughout the government shutdown. In an action plan to deal with the situation, the department warned of possible reporting delays and also said data might suffer “a degradation in quality.”

For Social Security recipients, a delay in the release of consumer price index (CPI) inflation readings could impact cost-of-living adjustments.

The situation could also affect the Federal Reserve, which relies on BLS data when making decisions about interest rates and other monetary policy-related matters.

“While the U.S. government may be heading for a shutdown, we expect little economic impact,” Bank of America’s head of rates strategy Mark Cabana said in a report. “A government shutdown will suspend economic data releases, and if the shutdown is prolonged, the Fed will have to rely on private data for its policy decisions.”

An inevitable consequence would be similar to the 2013 government shutdown, when the September jobs report was delayed until Oct. 22. The CPI for that month was also delayed by two weeks.

NerdWallet senior economist Elizabeth Renter agreed with most Wall Street analysis, believing the ultimate impact should be “relatively mild.” However, she pointed to the potential shock to the labor market.

“The most immediate and jarring effect is on the federal employees and contractors who are furloughed,” she said. “When families are forced to live without income, even for a week, it can seriously wound their financial stability.”