A U.S. Government Shutdown and the Economy It Affects

If you need something from the Commerce Department or the Department of Labor this week, it’s probably best not to hold your breath. According to analysis from the New York Times, the government shutdown that is now a reality is keeping 87% of the Commerce Department’s staff furloughed at home and 82% of the Labor Department. Most essential federal employees will be at work, but estimates put the number of furloughed government employees around 800,000, with another million or so being asked to work without pay.

The government shutdown will have real impacts on the U.S. economy, though the silver lining (if there is one) is that the negative effects may be only transitory. Much of the impact, though, depends on the length of the shutdown and the coming showdown over the debt ceiling.

Based on current estimates, we’d expect between 0.1% and 0.2% to be shaved off of U.S. GDP for every week that a shutdown continues. This loss reflects not only the absence of government purchasing of goods and services, but also the drain of lost earnings of government employees’ salaries. Looking back to the last instance of a government shutdown, back in the heady days of 1995 and 1996, the Congressional Budget Office estimated that the 26-day shutdown took around 0.5% off of GDP. The interesting effect is that in later periods the economy essentially made up the difference. Once the shutdown was over, the economy picked up the slack and recovered the lost potential. This looks to be likely outcome in the current situation too, with the caveat that the shutdown doesn’t go longer than the 1995/96 version and that unexpected or unintended circumstances don’t set the economy back on its heels. Lastly, a recovery is more likely dependent on the debt ceiling debate not going down a similar path and leading to a U.S. sovereign default.

Given all that, we are actually benefiting from the underlying health of the U.S. economy. The economy has been gradually improving for some time now, and we believe that it is now close to moving at an escape velocity that will allow it to break out of the low-orbit of sluggishness. There is a good deal of pent up demand from consumers. We’ve seen this in autos and housing, but apart from demand for goods, we’re also seeing pent up demand for services. Consumers are finally getting to the point where they’re comfortable taking those vacations they’ve been putting off for a few years.  When business sees that demand coming online, which we think will start in this quarter and continue into the first quarter of 2014, there will likely be a pick-up in hiring and investment.

While it’s of little comfort to those federal employees who have to go without a paycheck for the duration of the shutdown, when we look back on this event a year from now, we’ll likely see that the economy as a whole emerged relatively unscathed. Given that, let’s all hope that clear heads prevail and a solution can be found that benefits the economy both in the short term and in the long term.

 

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