The federal government closed Wednesday after lawmakers disagree with short-term funding measures ahead of the October 1 deadline.
As a result, all “essential” governments have stopped functioning, and hundreds of thousands of federal workers find themselves unpaid or working. Certain important government services, such as air traffic control and distribution of social security checks, remain online.
The Congressional Budget Office estimates that around 750,000 workers will be placed in full, costing the US economy around $400 million each day. In the past, Congress has voted to pay retroactively fasted workers and unpaid workers.
Government closures are devastating for both those who work in government and those who rely on their services. Historically, however, investors met them with a collective yawn.
“History reminds us that government closures are usually more of a headline making than the ultimate impact,” says Sam Stoval, CFRA chief investment strategist.
CFRA data shows that the government has suspended 21 times since 1976. Since 1984, the median period has been only four days. And when the government is funded, things quickly get back on track. In the 30 days after the closure, the S&P 500 was 71% since 1976 and 93% since 1984.
And the latest shutdown – the longest record on record that lasts from December 22, 2018 to January 25, 2019 – S&P scored 10.3%.
“Wall Street gets pretty cynical and gets pretty anesthetized (shutdown),” says Stovall. “Essentially, once this runs the course, I look forward to returning to Bull Run.”
Lack of data could leave the Fed behind “flying blinds”
That’s not to say that shutdowns do not raise short-term concerns about the market and the economy.
Part of the concern comes down to timing. It is unclear how long the deadlock will last, but if the closure is extended to Friday, it means that September pay data from the Labor Department will be delayed, says analysts at Wolfe Research.
“A long-term shutdown could also delay the collection of salary data for the November release of October. It would also be possible to delay the (consumer price index), but it is unlikely that the shutdown will end by October 15th,” they wrote Monday.
Historically, they added that delayed economic data will be released shortly after the closures have ended. Timing may be important this time. The Federal Reserve, which is expected to meet October 28th and 29th, will help guide interest rate policies using such data.
Moody’s chief economist Mark Zandy told CNBC.
Still, given access to personal data and information from its own survey, it is likely that the Fed has enough information to advance its expected interest rate cuts later this month, UBS analysts wrote in a note Tuesday.
Fara and layoffs can hurt the economy
Another potential short-term concern is the damage to the economy.
“A full shutdown could potentially reduce GDP growth by an estimated 0.1 percentage points per week, but this drug should be offset in subsequent quarters, assuming federal employees receive wage and spending trends,” UBS analysts wrote.
But President Donald Trump has raised certain cuts to permanent government programs in the event of closures.
“We can do things during a shutdown that is irreversible and bad for them and is irreversible,” Trump said Tuesday. “Cutting out huge numbers of people, cutting what you like, cutting what you like, cutting what you like.”
Vice President JD Vance reiterated his plans at a press conference Wednesday. “If the shutdown continues, we’ll have to fire some people,” he said.
“We don’t like it,” Vance said. “We don’t necessarily want to do that, but we’re trying to do what we need to do to continue our essential services for Americans.”
Such a move will likely drive the economy forever, but “legal and practical constraints mean that only a small, small number of an estimated 1.4 (million) workforce can be affected,” UBS analysts write. “Permanent dismissals likely face serious legal challenges and may not be supported by court.”
Do you want to be your own boss? CNBC’s new online course, how to get started: Sign up for first-time founders. From testing ideas to increasing revenue, find step-by-step guidance for starting your first business.
Additionally, we request that you sign up for CNBC to connect with experts and peers in our newsletter, money, and life to get tips and tricks for success in the workplace.
