As the partial government shutdown stretches on with no imminent resolution in sight, the political battle between President Trump and congressional Democrats over southern-border wall funding (and the norms of legislating) has taken the spotlight, as has the plight of the 800,000 federal workers most directly affected.
But beneath the wrangling and rhetoric of political gamesmanship, and beyond the genuinely moving stories of the paycheck-to-paycheck workers taking the economic brunt of the shutdown, there is the inescapable self-inflicted harm being done to the economy.
On Jan. 15, Kevin Hassett, the chairman of the White House Council of Economic Advisers, told the New York Times that the shutdown should chop quarterly economic growth by 0.13 percentage points for every week it lasts, doubling the administration’s initial estimation. On the same day, while discussing the bank’s fourth-quarter earnings, J.P. Morgan Chase CEO Jamie Dimon told media outlets that a prolonged stalemate could reduce first-quarter growth to zero and that the economy could eventually be pushed into a recession. Gregory Daco, chief U.S. economist at the British research firm Oxford Economics, told MarketWatch that he estimated the shutdown would shave 0.2 percentage points off first-quarter GDP if it lasts through January.
Though previous shutdowns have had a negligible effect on Wall Street (despite leading to underperformance on average), the markets don’t like uncertainty, and it’s difficult to see when the shutdown ends. Neither President Trump and the Republicans nor the Democrats, both beholden to diametrically opposed bases, seem to have any incentive to compromise. The president has proven to be mercurial and unpredictable, and congressional Democrats have proven to be unbending and unmoved. None of this helps allay volatility.
Daco also pointed out to MarketWatch that the shutdown has meant the loss of 10 key government data releases so far, including figures related to housing, trade, and consumer spending. Even when the government reopens, Daco said, it will likely take months to return to a normal schedule of reporting.
Investors are now, in essence, flying blind with limited visibility of normally available national and international economic activity. Investors negotiating the market with a lack of financial data will add to volatility as government shutdown extends further into the first quarter.
Because the shutdown is not a complete closure of the government, some agencies still open and those closed but still operating with employees deemed essential are dealing with totally closed agencies playing a role in the release of various economic data. But it’s difficult to say which agencies those are. Government agencies rely on one another to develop, analyze, distribute, and act on the financial data that is created. Financial data is typically generated by one agency, analyzed by another, and then distributed by a third organization within the federal bureaucracy. If any one of those steps is missing, the data generated by these different agencies will not get out to investors to give them some foresight into pathways to higher investment returns. For example, data on the country’s fourth-quarter economic growth is scheduled to be released on Jan. 30, but likely will not be available if the shutdown is still in effect.
For example, parts of the Labor Department are open, while parts of the Commerce Department’s Bureau of Economic Analysis are not. Inflation data isn’t available because, although it is prepared by the Labor Department, that information can’t be distributed to the investing public; the Commerce Department’s Bureau of Economic Analysis, deemed non-essential and thus closed, handles the distribution of that data. Similarly, factory orders reports, a good indication of corporate spending on large capital equipment and very valuable to know since we are on the verge of a trade war with China, is also unavailable. Considering the market impact of recent tariff announcements, current trends in factory orders would be a good indication of economic trends.
This shutdown started before the end of the fourth quarter. Consumer spending accounts for two thirds of Gross Domestic Product and the biggest consumer expenditures occur in the fourth quarter holiday season. Without this data, investors will be uncertain as to how strong the Christmas selling season was.
For consumers, one of the biggest individual expenditures is the purchase of a home and the related consumer durables such as appliances. Most home-buyers purchase a mortgage. When they go through the application process, they also have to go through a tax-filing verification process using the Income Verification Express Service of the Internal Revenue Service. This small unit within the Internal Revenue Service was initially deemed nonessential, is currently swimming in a backlog of mortgage applications, and cannot provide tax return transcripts for mortgage applications to the home-buyer’s lender. The processing of Small Business Administration (SBA) loans to small businesses ground to a halt because they too are dependent on the Income Verification Services.
Indicating how the impasse may be eased piecemeal—and fulfill the libertarian goal of reducing government’s size—furloughed employees in the Income Verification Express Service unit were recently called back, with the agency relying on user fees to help pay their salaries.
Also caught up in the logjam are additional financial benchmarks such as wholesale prices, which are incomplete since that data will not include agricultural prices, due to the Agricultural Department being temporarily shuttered. The agricultural sector is being targeted by the Chinese government, which is halting purchases of U.S. agricultural products. As a result, the prices of some products have fallen precipitously. In analyzing trade talks, it would be good to know which way and how much the pricing of those goods is moving.
The shutdown itself affects the economic numbers. For example, the unemployment rate may be artificially inflated due to the jump in unemployment filing by the furloughed federal employees. They may be counted as unemployed for the month of January even though they will be available to return to work and given back pay after the shutdown is ended. This could raise the unemployment rate by as much as 0.2%, which normally could be a jolt to the system by pushing job growth negative for the month. This does not even count the peripheral jobs and business that provide goods and services to a suddenly frozen federal government. Think of a hotel operator who has a contract with the National Park service to rent and run a resort in a now closed national park, now stuck with a wave of cancellations and an idled staff who are not federal employees and still being paid. Or a diner operating near Independence Hall and the Liberty Bell facing diminished traffic as tourists cancel trips to Philadelphia.
Until the government is reopened, the cloud of financial uncertainty hanging over the markets will only grow and become more ominous.
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