US Government Shutdown Paused for Now: Assessing the Economic Impact
The longest-ever US government shutdown has finally ended—at least temporarily—while negotiations continue over funding of a US-Mexico border wall. While the government will be reopened at least until February 15, the economic implications of the shutdown and the potential for more disruption ahead has become a source of concern to many global investors. Stephen Dover, Head of Equities for Franklin Templeton, outlines some considerations investors should keep in mind.
The US government’s most recent shutdown ended after 35 days, but was still longer than any previous shutdown in history. We know the reasons why it occurred—President Donald Trump wants $5.7 billion in funds for a US-Mexico border wall, but Congressional Democrats are loath to grant that sum for this purpose. While the government has been reopened and furloughed workers will receive back pay, the border issue remains at an impasse.
The overall impact of the latest shutdown is not as big as the one in 2013, due to differences in its breadth; in 2013, the shutdown covered the entire federal government and affected more services.1
This time around, the shutdown seemed to be managed in a way that minimized the overall impact. One example of the containment is the Internal Revenue Service (IRS). A large part of the IRS was closed in 2013, but this time, Congress had directed the payment of tax refunds through a permanent appropriation. In addition, national parks remained open during the shutdown, whereas they were closed during the 2013 shutdown.
One area we have seen some near-term impact is with government agencies that regularly release a number of economic reports. Many statistics that feed investment or financing models have been on hold. For example, high-frequency economic indicators on gross domestic product, business investment, trade, and housing and construction from the Bureau of Economic Analysis and the Census Bureau haven’t been available as regularly as they usually are. That means we could have some data distortion going on even though the shutdown has ended, which could influence the way economic health is being reported.
We could see some distortion in employment readings, for example, particularly if the shutdown resumes in February. The 2013 shutdown began October 1 and was resolved by October 17, but the data calendar was impacted all the way through December. We would be concerned this could lead many to anticipate a recession is building sooner than the most recent economic data would indicate.
Over the long term, these data disconnects should reconcile, but near term, we could see more uncertainty about where the US economy stands until a firm spending deal is reached. The markets don’t typically respond favorably to uncertainty. That being the case, we could see heightened market volatility.