Remember: In the 1995-1996 shutdown, government employees eventually got paid back their lost wages.
Some Perspective on the Government Shutdown
As we've described, the ongoing government shutdown is not a big deal on its own. The debt ceiling is what's important; the government shutdown is largely just an indication of the political dysfunction in Washington that is increasing the risks. In these Observations, we'll offer some perspective on the government shutdown that we think is helpful for putting it in context. Our main reflections are:
· The impact of the government shutdown on the US economy is likely to be pretty limited if it lasts only a short time. The government is so far cutting spending by something like a billion dollars or so a day. Most of the spending that's been turned off so far is probably employee compensation, and not all of those wage cuts will translate to actual declines in spending. That's particularly true if, as happened in the 1995/6 shutdown, government employees eventually get paid back the lost wages. The shutdown could have a bigger impact if it continues for a few months. This is because government employees may be forced to cut spending, and a greater share of the disruption may not be fully made up for in subsequent quarters. A very rough estimate is that if the shutdown extends to the end of the year, it could subtract about 3% (annualized) from GDP growth through the fourth quarter.
- With the debt ceiling set to be reached in a few weeks, the two issues are getting more entangled. Since the government shutdown, the market has been pricing in increasing (though still small) risks around the debt ceiling.
- There is also some suggestion in the recent stats that the government budget issues are hitting confidence. But the deterioration so far is modest and not a big deal.
- The government shutdown of 1995/6 provides some historical comparison for how a government shutdown affects markets. The government shut down twice for close to a month in total during that episode. The impact on markets was very modest. Stocks and bonds sold off a bit around the major turning points, but recovered fast, and overall it's clear that the shutdown didn't have a meaningful impact on asset prices.
- A consequence of the shutdown is that the government won't be releasing a number of the major economic stats (including the employment report). From our perspective, there are plenty of other stats, tracked by the private sector and by the Fed, that provide more than enough information to get an accurate read on what's happening to US conditions. So we don't think the loss of the government stats is a big deal either.