Dear Clients & Friends,
Over the last few weeks, many people have asked about the economic effects of the recent government shutdown, which was the longest in US history. We thought that we’d use this Weekend Reading as an opportunity to pass along some related information. A temporary appropriations bill extended funding for shuttered federal agencies until yesterday, February 15th, while a bipartisan committee negotiated a new spending bill for the Department of Homeland Security. As of mid-week week, a deal had been reached and the government will not shut down as feared. Regardless, we hope that this data gives our readers some perspective.
For your convenience, we have provided footnotes for the vast majority of data gathered for this article.
Nine departments closed
The shutdown began on December 22, 2018, when funding lapsed for nine cabinet-level departments (Agriculture, Commerce, Homeland Security, Housing and Urban Development, Interior, Justice, Transportation, Treasury, and State) and a number of other government agencies.2
About 800,000 federal workers missed two consecutive paychecks.3 Some 380,000 of these workers were originally placed on unpaid leave (furlough), while 420,000 were deemed "essential" and required to report to work without pay.4 As the shutdown continued, tens of thousands of furloughed workers were ordered back to work without pay.5
All federal employees will receive full back pay as soon as possible, but about 1.2 million government contractors had no guarantees and may lose income permanently. It has been estimated that contractors suffered lost or delayed revenue in excess of $200 million a day during the shutdown.6-7
Family hardship and public safety
Missing paychecks caused hardship for many families and was especially difficult for lower-paid essential workers. Furloughed workers in many states could apply for unemployment benefits or seek other employment opportunities.
The most visible manifestation of this issue was an increase in the number of absences of Transportation Security Administration (TSA) workers. On January 20, the absentee rate for TSA airport screeners was 10%, up from 3.1% on a comparable day last year. According to the TSA, many workers took time off for financial reasons, such as an inability to pay for child care or transportation. Increased absences resulted in long lines, delays, and gate closures at some airports.8
Air traffic controllers, who are better paid, remained on the job without pay and without their normal support staff. However, on January 25, an increase in controller absences temporarily shut down New York's LaGuardia Airport and led to substantial delays at airports in Newark, Philadelphia, and Atlanta. This may have been an impetus to reopen the government later that day.9
Other public safety employees who worked without pay include the U.S. Coast Guard, customs and border protection agents, and law-enforcement officers at the Federal Bureau of Investigation, U.S. Marshals Service, Drug Enforcement Administration, and Bureau of Prisons.10
While essential workers maintained some federal services, furloughed workers left significant gaps in others. National parks were closed or understaffed, resulting in lost revenue, vandalism, and mounting trash.11 Many federal services were delayed or suspended, ranging from food inspections, the operation of civil courts, consumer protection services, rural home loans, and federal reports that are used for everything from projecting the economy to deciding what crops to plant.12-16
The IRS called back 26,000 furloughed workers to process tax refunds, but almost 14,000 of them had not reported back to work by January 22. The IRS is understaffed under normal circumstances and it may take time to get back up to speed, adding to the challenges of processing returns under the new tax law.17 About $2 billion in tax revenue may be lost as a result of reduced IRS compliance efforts during the shutdown.18
Broader economic impact
According to the nonpartisan Congressional Budget Office (CBO), an estimated $18 billion in government spending was lost or delayed during the shutdown. This includes $9 billion of direct spending on goods and services and $9 billion in compensation for federal employees. Assuming that the government stays open, most of this is expected to be recouped over the next eight months, but $3 billion in gross domestic product (GDP) may be permanently lost.19
Three billion dollars is a tiny fraction of total US GDP — about 0.02% — but quarterly GDP growth may take a larger hit. The CBO projects an annualized loss of 0.2% growth in the fourth quarter of 2018 and 0.4% in the first quarter of 2019. Thus, the CBO's pre-shutdown estimate of 2.5% annualized growth in the first quarter would be reduced to 2.1%. GDP growth may be 1% higher than expected in the second quarter.20
Even if delayed spending is recovered, lost productivity by furloughed workers and government contractors cannot be regained.21 Consumer confidence dropped in December and January, partially due to the shutdown, but may rebound if the government remains open.22 A longer-term concern is the potential loss of federal workers, including employees who left for other opportunities and qualified candidates who may look elsewhere due to doubts about the future stability of federal jobs.23
I think that’s a good overall summary. Regardless of agreement or disagreement with the shutdown, and/or the strategy of the President, it is hard to be unsympathetic towards the innocent individuals affected. It’s also important to note that the new deal does not include lost back pay for independent government contractors. The long-term economic costs of the shutdown may be relatively small, but the effect on individuals who were financially impacted or who missed out on government services could be significant.
We hope this article provides some perspective. Have a lovely weekend.
1, 9) The Washington Post, January 25, 2019; 2, 18-20) Congressional Budget Office, January 2019; 3, 23) CNBC, January 26, 2019; 4) The Wall Street Journal, December 21, 2018; 5, 13) CNN, January 16, 2019; 6) Federal News Network, January 28, 2019; 7) Bloomberg, January 17, 2019; 8) Associated Press, January 21, 2019; 10) ABC News, December 29, 2018; 11) nationalgeographic.com, January 7, 2019; 12) The Wall Street Journal, January 9, 2019; 14) Federal Trade Commission, December; 28, 2018; 15) CNBC, January 9, 2019; 16) CNN, January 8, 2019; 17) The New York Times, January 25, 2019; 21) S&P Global Ratings, January 11, 2019; 22) The Conference Board, January 29, 2019. Research and content herein provided by Broadridge Investor Communication Services.
Matthew Ramer, AIF®
Principal, Financial Advisor
MOR Wealth Management, LLC
1801 Market Street, Suite 2435
Philadelphia, PA 19103
P: 267.930-8301 | c: 215-694-4784 | f: 267.284.4847 |
601 21st Street, Suite 300
Vero Beach, FL 32960
The majority of this content was written and distributed MOR Wealth Management, all rights reserved. Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a registered investment adviser. Fixed insurance products and services offered through CES Insurance Agency.