The United States government is currently “shutdown,” which means non-essential, discretionary federal programs are closed until the shutdown is halted. The shutdown began on December 21, 2018 due to conflicts between President Donald Trump and Congress regarding the construction of a wall along the southern U.S. border. On January 12th, 2019, this shutdown became the longest in the country’s history.
It should go without saying that a government shutdown has some effects on the US economy, the question is how significant and long-lasting are those effects?
Shutdown Effect on GDP
A number of major banks including JP Morgan, Merrill Lynch, and Morgan Stanley are guiding for a negative effect on GDP due to the shutdown. Some banks, like Merrill Lynch, are guiding for a negative effect on GDP of as high as 2% for a month-long shutdown, while JP Morgan estimates the net effect to be 0.5%.
This is mainly due to two concrete factors. The first being that roughly 800,000 government employees have been laid off, meaning that they’re spending very little right now. The second is that government spending has a significant effect on GDP, and because a large portion of federal discretionary spending has been halted for the duration of the shutdown, it follows that we’ll see a dip in GDP during the shutdown. However, most economists acknowledge that the country usually sees a considerable uptick in GDP when a government shutdown ends, which can offset the negative effects.
Beyond those factors, there are more abstract factors like the negative consumer confidence a government shutdown can cause, not only in the economy, but in the government, which can suppress spending.
Consumer and Investor Confidence
Viewing the effects of a government shutdown through the glass of GDP may not be the best way to get an accurate view. Non-essential federal employees make up roughly 0.5% of the American workforce, and a bill was passed on January 16th, 2019 that guarantees government employees that their paychecks will be fully restored when the shutdown ends.
The real effects of the shutdown lay in consumer and investor sentiment in the face of this shutdown. Unfortunately, the only way to measure the effects of sentiment are usually in hindsight. The only thing we have to go off is surveys.
The data is showing that the shutdown is having a decidedly negative effect on consumer sentiment. In fact, the University of Michigan’s Monthly Index of Consumer Sentiment has hit its lowest point since November 2016, when President Trump won the election.
When it comes to investor sentiment, the Congressional Research Service reported that the 2013 government shutdown negatively affected investor confidence, however, the stock market is telling a different story this time.
Past Shutdowns
When projecting the economic effects of this government shutdown, it’s important to look at what past government shutdowns looked like, and how long their effects lasted.
Macroeconomic research firm LPL Financial conducted a study of S&P 500 returns during each government shutdown during US history, and they found that the median change in the S&P 500 is 0.0%. That’s right. Nothing.
When it comes to consumer confidence, it also dipped during the most recent government shutdown in 2013, and it quickly rebounded in the following months.
Summary
While one shouldn’t take a government shutdown lightly, history has shown that the economy and market have largely shrugged them off pretty quickly. With that said, shutdowns have historically been quite short, for example, all of President Reagan’s shutdowns lasted a few days, and with the current shutdown lasting over a month, it leaves some questions unanswered.
Article By: Patrick Crawley
