On October 1, the U.S. federal government entered a shutdown, disrupting the release of key economic indicators at a time when decision-makers, including officials at the Federal Reserve, are grappling with uncertainty about labor market conditions, inflation trends, and the resilience of consumer and business spending. Despite this disruption, historical patterns suggest that such shutdowns rarely inflict lasting harm on the broader economy, even though they complicate the decision-making process for policymakers and market participants.
Over the past 50 years, there have been 20 shutdowns, averaging eight days in duration, with a median length of four days. These relatively brief interruptions have generally not been long enough to significantly undermine economic performance, despite halting certain public services and delaying pay for federal employees.
The current impasse limits access to authoritative data from agencies like the Bureau of Labor Statistics (BLS), the Bureau of Economic Analysis, and the Census Bureau. As a result, analysts and investors must rely more heavily on private-sector datasets, which are often considered less comprehensive. Chicago Fed President Austan Goolsbee expressed concern over the timing, stating that the absence of official statistics comes precisely when clarity on economic transitions is most needed.
Last month, the Federal Reserve reduced interest rates for the first time since December, reflecting growing unease about employment trends. However, internal projections indicate that not all policymakers see sufficient risk in the job market to justify additional rate reductions in the near future. A recent report from ADP showed an unexpected decline of 32,000 private-sector jobs in September, with employment falling in three of the past four months. Without timely BLS data to verify these findings, experts face challenges in assessing the reliability of alternative metrics.
Recent controversies, including major revisions to BLS figures and the August dismissal of the agency’s director by former President Trump, have weakened confidence in federal data. This has led some economists, such as Matthew Martin of Oxford Economics, to expand their reliance on non-governmental sources like the ADP employment report.
Although hundreds of thousands of federal workers are currently furloughed and many government operations are suspended, the macroeconomic impact remains limited. Only two shutdowns coincided with economic contractions: a two-day closure in November 1981 under President Ronald Reagan and a three-day halt in October 1990 under President George H.W. Bush—both occurring during pre-existing recessions.
A series of intermittent shutdowns in late 1977 under President Jimmy Carter totaled 31 days across three months, contributing to a stall in growth. Yet economic activity rebounded the following quarter, and consumer spending remained largely unaffected. On average, consumption has increased by about 0.5% during months impacted by past shutdowns. During the longest shutdown—35 days from late 2018 to early 2019—spending dipped by 0.3% over the two affected months. However, economists attributed this more to fading effects of earlier tax cuts and ongoing trade tensions with China than to the shutdown itself.
While temporary spikes in unemployment claims occurred among federal workers during previous shutdowns, these did not spill over into the broader labor market. Historical Labor Department records show little change in overall jobless claims or the national unemployment rate during such periods.
Scott Helfstein, Global X’s Head of Investment Strategy, noted that while government closures are disruptive and create administrative chaos, there is scant evidence of meaningful economic damage. He added that any lost output tends to be recovered in subsequent quarters.
— news from Reuters
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US government shutdowns raise uncertainty but rarely have lasting effect on economy
Oct 1 (Reuters) – The U.S. government shutdown has thrown the brakes on the flow of federal economic data at a moment of uncertainty and division among policymakers like those at the Federal Reserve about the health of the U.S. job market, the trajectory of inflation and the strength of consumer spending and business investment. n nBut the shutdown itself – if history is any guide – is unlikely to leave a lasting imprint on the U.S. economy itself, even if it leaves policymakers and investors flying somewhat blind for an unknown stretch. n nSign up here. n nOver the last half century, the 20 previous shutdowns have lasted on average eight days and a median of four days, hardly long enough for the suspension of some government services and pay to federal workers to crater the economy. n nThat doesn ‘t mean it isn ‘t a headache for investors and officials tasked with economic stewardship. n nFor as long as the closure lasts, they will have to sift through a clutch of private-sector-sourced data sets that have been seen as limited substitutes for the granular figures issued by the Bureau of Labor Statistics, Bureau of Economic Analysis and Census Bureau. n n”It pains me that we wouldn ‘t be getting official statistics at exactly a moment when we ‘re trying to figure out is the economy in transition,” Chicago Fed President Austan Goolsbee said Tuesday on “The Claman Countdown” on Fox Business. n nJOBS REPORT DELAYED DURING SHUTDOWN n nThe Fed cut interest rates last month for the first time since December on growing concern about the job market. Projections from policymakers issued alongside that decision, though, showed a number of them are not convinced risks to the job market are significant enough to warrant more cuts in the near term. n nA measure of private-sector employment from payrolls processor ADP showed employers unexpectedly reduced headcount by 32,000 jobs in September, and private employment by their count has fallen in three of the past four months. With no data coming soon from BLS to truth-test that outcome, officials and economists have to decide how much weight to put on a data series long viewed as a poor proxy for the government data. n nAt the same time, recent large revisions to BLS data – and Trump ‘s firing of the BLS chief in August – have dented the agency ‘s credibility and have spurred interest in alternative data sources, including ADP. n n”Growing concerns about the integrity of governmental economic data as well as the ongoing government shutdown have emphasized the need to broaden our data coverage, which will now include the ADP national employment report,” Matthew Martin, Senior US Economist at Oxford Economics, wrote on Wednesday. n n ‘INCONVENIENT AND MESSY ‘ n nMeanwhile, even though hundreds of thousands of federal workers are on furlough and a range of important government services are suspended, shutdowns themselves don ‘t typically move the needle for the economy. n nIn only two shutdowns was there a contemporaneous contraction in economic activity – in a two-day shutdown in November 1981 under President Ronald Reagan and a three-day closure in October 1990 under President George H.W. Bush. In both cases, however, the economy was already in recession before the shutdowns occurred. n nDuring stop-and-start shutdowns in the fourth quarter of 1977 under President Jimmy Carter that led to a total of 31 days of government closure spread over three months, economic growth skidded to a halt and curtailed government spending was a net drag on the economy. But growth snapped back the following quarter, and overall consumer spending was not slowed during the outages. n nIn fact, consumer spending on balance has continued to grow during the months affected by past shutdowns, growing by an average of about 0.5%. During the longest shutdown on record, a 35-day closure from late December 2018 through most of January 2019 during Trump ‘s first presidency, consumption over the two affected months fell by an average of 0.3%, but economists then blamed the slowdown on dissipating tailwinds from the tax cuts enacted earlier in Trump ‘s term and by the trade war he had kicked off with China. n nAnd while the most recent shutdown during Trump ‘s first term saw a short-lived rise in claims for unemployment benefits by furloughed federal workers, that didn ‘t bleed into the wider job market. Labor Department data shows little movement historically in new claims for jobless benefits or in the U.S. unemployment rate during the periods affected by shutdowns. n n”Government shutdowns are inconvenient and messy, but there is little evidence that they have a significant impact on the economy,” said Scott Helfstein, Head of Investment Strategy at Global X. “Typically, the lost economic activity, if meaningful in the first place, is recovered in the following quarter.” n nReporting by Howard Schneider, Ann Saphir, Dan Burns and Lucia Mutikani Editing by Nick Zieminski