If Republicans and Democrats can’t cut a last-minute deal, a federal government shutdown would probably exact at least a small toll on the U.S. economy.
Furloughed federal workers and frozen government contracts, among other damage, would likely draw billions of dollars out the economy for every day the government remains shuttered. The stock market — once described by President Donald Trump as a “big fat ugly bubble” — could also find a reason to stage a sell-off that many on Wall Street believe is long overdue.
Generally, brief government shutdowns are much less damaging to the economy, and overall business and consumer confidence, than fights over raising the nation’s debt limit that could end in catastrophic default. But they still exact pain, analysts say.
And depending on how long a shutdown lasts, it could slice away some potential economic growth in the first quarter of the year, possibly limiting the power of one of Trump’s favorite talking points. It also could slow some of the current economic tailwind provided by the GOP’s big corporate and individual tax cut bill.
“A shutdown, particularly if it’s short, wouldn’t be a catastrophic event,” said Beth Ann Bovino, chief U.S. economist at Standard & Poor’s. “The economy is chugging along at a pretty nice pace. This would be like getting a couple dents in our nice, shiny fender.”
S&P issued a report in December, when another shutdown loomed, estimating that each week the government remained shut would cost the economy $6.5 billion, or a reduction of 0.2 percent in potential GDP growth.
Most of this would come from the hundreds of thousands of federal workers who would be furloughed and miss paychecks. Federal workers would likely receive that back pay, but productivity lost during the shutdown would never come back.
Shutdowns also freeze work by federal contractors, hitting both small and large businesses that depend on government revenue. Unless the Trump administration succeeds in plans to keep federal parks open, a shutdown also could impact tourism dollars that would likely never get spent, taking a bite out of both federal government revenues and those of small businesses around the nation’s parks.
Estimates of the last government shutdown in October of 2013 found that the 16-day standoff cost the economy anywhere from 0.2 percent to 0.6 percent in economic growth. S&P estimated it took $24 billion out of the economy. Still, the U.S. economy wound up growing 4 percent in the fourth quarter of that year, suggesting any impact was largely temporary. Business and consumer confidence, however, did take a hit from the 2013 shutdown, something that could happen again if the current impasse drags on for more than a couple of weekend days.
“The question really is whether it affects confidence and markets and is there any spillover from that into the economy,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics. “In recent years the really more extreme impact was from the debt limit sagas more than just shutdown threats. But even in the 2013 shutdown you had a drop in confidence and an increase in uncertainty over the ability of policy makers.”
So far, Wall Street is largely shrugging off the shutdown threat.
After closing over 26,000 for the first time this week — just eight days after breaking 25,000 — the Dow rose slightly on Friday as the clock ticked down toward the midnight Friday deadline to keep the government open.
Both the Nasdaq and S&P also rose slightly on Friday even as a shutdown seemed more likely by the moment. Investors say this nonchalance is based on the notion that any shutdown would be short and have minimal effect.
Very little has been able to stand in the way of a relentless stock market rally based on synchronized global growth, tax and regulatory cuts in the U.S., continued easy money policies from central banks and the anxiety of investors who don’t want to miss out on the good times. A short shutdown does not seem immediately likely to make much difference.
“In the U.S., we are inured to this screwed up, over-tweeted, asymmetrical, political process. The rest of world fails to understand our process, so they may sell off,” said David Kotok, chief investment officer at Cumberland Advisors. “Any deep-dive sell off is a buying opportunity.”
There was some impact of the impending shutdown to be found in markets, however. Gold prices rose and the dollar fell on Friday, suggesting investors were seeking safe-haven assets amidst political uncertainty in the United States.
The dollar has been falling in recent weeks, surprising some analysts who would expect it to rise along with interest rates as the Federal Reserve continues its path of tightening monetary policy. Tax cuts and faster economic growth should also be pressing the dollar higher. Part of the reason that’s not happening could be political uncertainty.
While a shutdown may not be the kind of trigger that could cause mayhem in global markets, a big fight over the debt limit, which could emerge as soon as next month, would be much more worrisome.
So far, analysts do not believe that kind of crisis will emerge. “Despite the positively noxious conversation on Capitol Hill currently, we firmly believe that Congress will not play chicken with the debt ceiling once again,” Compass Point Research and Trading’s Isaac Boltansky wrote in a note to clients on Friday.