Longest Government Shutdown in History

Over the weekend the current government shutdown surpassed the shutdown in 1995-1996 to be the longest shutdown in U.S. history. According to Standard and Poors, the shutdown has cost the U.S. economy ~$4 billion and they estimate that if it continues for two more weeks the cost will rise to ~$6 billion. They have stated that the economic loss stems from lower productivity due to furloughed workers and other indirect impacts on the economy such as tourism and government contractors.

It is important to note that this is a small fraction of the U.S. economy which is ~$19 trillion. It is estimated that once the government reopens many workers should recoup their lost wages so if there is an economic impact to GDP (which is unlikely given the economic loss as a percent of GDP, less than 0.05%) it should be short-lived.

We looked at three of the longest previous government shutdowns to see if there was any consistency on the impact (if any) on the economy, spending, confidence, and the labor market. It is important to remember that each of the past three shutdowns that we observed occurred during different economic environments and impacted a different number of Federal workers. As summarized in the table below, there is not a significant consistency seen among the data surrounding the prior three shutdowns.

As of now, there has been no change to the estimate for 4Q18 GDP (2.6%) and only a very modest downgrade to 1Q19 GDP (from 2.3% to 2.2%) which cannot be pinpointed to only the government shutdown. We believe we may see an impact from lack of economic data being released. For example, if the government does not reopen by the end of the month we may not receive the advanced reading of GDP for 4Q18 or data on retail sales. The lack of data may make it difficult for the Federal Reserve to get a full picture of the health of the economy in order to make decisions on monetary policy.

If this shutdown persists for an extended period we may start to see an impact on confidence, especially given how low the approval rating is for the current government (Congress and White House). However, the equity market has shrugged off the recent shutdown as seen by the strong global rally. Our last concern is if rating agencies begin threatening the credit rating of the U.S. government, especially if the shutdown continues into March when the debt ceiling debate resurfaces. In 2011, the downgrade of the U.S. credit rating resulted in significant volatility for the equity market and nearly threw the S&P 500 into a bear market territory.

Historical Look at Government Shutdown

Source: Data as of January 10, 2019.
Footnotes: Bloomberg Finance LP, Verdence Capital Advisors.