Government Ajar

Tom Brown |

The partial US government shutdown has ended with a short-term truce reached last Friday, sending roughly 800,000 government employees back to work this week.  While certainly not the first shutdown, this was the longest shutdown in US history, dominating headlines and lasting 35 days.  At the core of the shutdown is the stalemate between the White House and Congress over funding for border security, primarily President Trump’s wall along the US-Mexico border. Politics aside, let’s take a look at different aspects of the economy the shutdown impacted and continues to impact either directly or indirectly, as well as how it has affected the overall confidence people and businesses currently have in the economy.

The most obvious impacts are the direct effects on 800,000 government workers that were either furloughed during the shutdown, meaning they do not report to work and do not receive their paychecks, or were considered “essential” employees, meaning they were forced to work without pay during the shutdown.  By either account, employees across nine federal departments and numerous agencies, including Homeland Security, Justice, State and Treasury, and Environmental Protection Agency were impacted.  As bills and anxiety mounted and with many workers forced to pull from savings or find other ways to stretch their dollars, this was clearly a disruption to all families and individuals. Many employees are still left in limbo as they wait for their back pay to arrive, further exacerbating personal financial issues. The morale of workers clearly took a hit as well, as most employees considered federal jobs a consistent source of employment. Glassdoor.com, a company dedicated to workplace transparency, noted on January 11 (marking the first paycheck employees missed) resulted in a 10% increase in workers from the affected federal agencies seeking new positions via search engines. Additionally, the number of applications on Glassdoor for jobs at such agencies dropped by a staggering 46%, a trend that worsened as the shutdown continued (Glassdoor.com 1/24/2019).

Indirect effects also rippled throughout the economy.  Notable examples include those that service federal workers like contractors, small businesses, and restaurants, all of which lost significant income that will likely not be recouped. Tourism is another area impacted, with many museums closed as well as limited services available at National Parks, many chose not to travel, additionally noting significant delays at large airports due to safety concerns with limited air traffic controllers and TSA agents on staff as many did not show up for work.  The Small Business Administration stopped approving small-business loans, the life-blood of many small business, and more than 40,000 immigration hearings have been cancelled (Vox – 1/24/2019), adding to an already sizeable backlog as judges were furloughed.

The last and possibly toughest impact to quantify are the lingering effects to consumer confidence, which could be the hardest to reverse.  Estimates vary as to the monetary value of lost output during the shutdown. The Congressional Budget Office said Monday the shutdown reduced economic activity by about $11 billion, cutting economic growth by 0.2 percentage points at an annual rate in the fourth quarter and 0.4 percentage points in the first quarter, which is material for an economy expected to grow 2.5% (USA Today 1/27/2019).  Additionally, the University of Michigan released its consumer confidence index, indicating a substantial drop, to a more than two-year low (90.7 indicating a decrease of over 5.0% year-over-year). While the shutdown may not necessarily account for this drop on its own, it is definitely on the minds of consumers, of which consumer spending accounts for roughly 68% of the US economy.  A sharp drop in confidence is a key indicator of future recession risk.  According to the University of Michigan, if the drop persists or gets worse, the risk of a deeper economic slowdown gets substantially higher (https://insurancenewsnet.com/innarticle/economic-costs-of-shutdown-starting-to-pile-up#.XFCpy1VKiUk)

This brief commentary by no means attempts to document the full impact of the shutdown nor the hardships imposed across various aspects of the economy, but hopefully highlights how disruptive such events are to the entire economic system. While is not certain that the government shutdown will have significant lasting impacts, further disruption is almost undoubtedly going to start a vicious cycle of lowering confidence and lowering consumer spending  if the stalemate in Washington is not resolved quickly, as the government is set for another shutdown on February 15.