Government shutdowns usually have little economic impact. This time could be different

For all the political firestorms they generate, government shutdowns historically have been nonevents for both markets and the economy.

This time, though, could be different.

That’s because President Donald Trump’s threat to make some federal government furloughs resulting from the shutdown permanent could have longer-lasting impacts on an employment picture that already has been looking precarious.

Should Trump follow through on the threat — and successfully weather what almost certainly would be yet another court challenge to his executive authority — it throws a wrench into what otherwise have been much more political than economic events.

“We have reason to think that a shutdown this time may not follow past precedent,” Michael McLean, public policy senior analyst at Barclays, said in a client note. If Trump follows through, “this would be a significant departure from past practice and could inject new uncertainty into the economic effect of a shutdown, which otherwise we would expect to be marginal.”

Indeed, shutdowns in the past have left little mark other than the political damage done to the party perceived as at fault.

Markets have sold off on occasion but then quickly recovered. For growth, most economists calculate the impact as about 0.1 percentage point off gross domestic product for week. Being that the longest closure lasted 35 days, from-late 2018 until the following January, that’s not a lot for a $30 trillion economy. The short-term losses are usually easily recouped in subsequent quarters, according to Bank of America.

However, in this case the labor market already has been wobbly. In particular, the Washington, D.C. region, where a large share of federal government employees call home, has taken a hit from the layoffs earlier this year advocated by Elon Musk’s Department of Government Efficiency advisory board.

Shutdowns automatically mean that employees not deemed essential are furloughed, but are always summoned back once the impasse ends. Trump threatened, in an NBC News interview Sunday, that “we are going to cut a lot of the people that … we’re able to cut on a permanent basis.”

The impact on the monthly nonfarm payrolls report wouldn’t show up until the October count is released in November, where Trump’s threat “could have a more severe near-term impact” than usual, wrote Nomura economist David Seif.

But that brings up another wrinkle: Should the shutdown last any significant amount of time, it could delay the release of key economic data.

The situation also could impact the Federal Reserve, which relies on BLS data when making its decisions on interest rates and other matters relating to monetary policy.

“While the US government may be headed for a shutdown, we expect little economic impact,” Mark Cabana, head of rates strategy at Bank of America, said in a note. “A shutdown would pause economic data releases, leaving the Fed reliant on private data for its policy decisions if the shutdown extends.”

One corollary would be the 2013 shutdown, when the September jobs report was delayed until Oct. 22. That month’s CPI also was postponed by two weeks.

Elizabeth Renter, senior economist at NerdWallet, concurred with most Wall Street analyses in that the ultimate impact should be “relatively mild.” However, she noted the potential hit to the labor market.

“The most immediate and impactful effect is on furloughed federal employees and contractors,” she said. “When households are forced to go without income, even for a week, it can set back their financial stability significantly.”