U.S. Government Shutdown: What it Means for Markets
As of December 22, parts of the federal government deemed non-essential for national security shut down. Running a full month, this is the longest shutdown in U.S. history, with no end in sight. Our instinct is that the political battle – waged over border wall funding – is unlikely to last beyond this quarter. Both political parties include staffers and constituencies that rely on federal funding for their well-being. However, as the shutdown drags on, we could see more meaningful economic and financial market consequences.
Economic impact of the shutdown
Estimates indicate that for every ten days of government shutdown, about 0.1% is shaved from quarterly GDP growth. This comes from the direct impact of the shutdown. There is less government money to boost economic activity or complete government investments. There is also less money in federal workers’ pockets; on Friday, January 25, federal workers will miss their second paycheck – and that’s true whether they are required to come to work or stay at home (furlough).
It’s possible that we could see a minor rebound in activity once the government opens and paychecks are received. However, if the shutdown drags on, we could see economic impacts that are more difficult to measure. For example, discouraged federal workers could decide to find new jobs rather than deal with uncertainty around their paychecks. Furlough in agencies such as the FDA has a lower impact at first, but higher impacts if food and water cannot be examined for sustained periods of time.
What about markets?
Financial markets have rebounded in January after a strong bought of downside volatility at the end of 2018. That volatility was due in part to uncertainty about the strength and duration of the U.S. economic recovery.
For now, markets are taking the government shutdown in stride. Shutdowns have rarely had lasting negative impacts on the economy or financial markets; shutdowns have not lasted longer than a few weeks, and federal workers are repaid in full.
S&P 500 Performance During Government Shutdowns
Source: New York Life Investments, S&P, Thompson Reuters Datastream, as of 1/22/19. Past performance is not indicative of future results. An investment cannot be made in an index.
Over time, however, the impact of uncertainty is likely to contribute to increased volatility. The shortage of economic data available, for example, will increase uncertainty and make it harder for businesses to plan. Investment could be stalled as a result. Financial markets would likely translate that uncertainty into volatility in the coming weeks.
If the government shutdown is resolved within Q1, we think that the U.S. economy will see some moderate impacts but will not face lasting effects. While it is hard to gauge the “line in the sand” for market confidence, we think that a shutdown lasting into the second quarter would begin to have a meaningful impact on consumer confidence and market confidence. Upcoming political battles, such as the debt ceiling, could be analyzed with less confidence than in previous years. While we think an U.S. default is highly unlikely, we would approach such U.S. political timelines with heightened caution.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
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