Historically, federal government shutdowns in the U.S. have caused minimal disruption to economic performance and financial markets, despite generating intense political debate. However, the current situation may diverge from past patterns due to new policy threats that could extend consequences beyond temporary work stoppages. n nFormer President Donald Trump recently suggested that some furloughed federal workers might not return to their roles, indicating plans for permanent workforce reductions. If implemented, and assuming legal challenges to executive authority are overcome, this shift could introduce lasting effects on employment trends already showing signs of fragility. n nMichael McLean, a senior public policy analyst at Barclays, noted in a client report that such actions would mark a break from historical norms. He warned that this scenario might amplify uncertainty around the economic fallout of a shutdown, which is typically considered negligible. n nPast shutdowns have had limited macroeconomic repercussions. For instance, each week of closure is estimated to reduce GDP growth by approximately 0.1 percentage point. Given the size of the U.S. economy—valued at around $30 trillion—even the longest shutdown, lasting 35 days between late 2018 and early 2019, resulted in short-term losses that were quickly recovered in subsequent quarters, according to Bank of America. Political consequences often outweighed economic ones. n nNonetheless, present conditions differ. The Washington, D.C. metropolitan area, home to many federal employees, has already experienced job losses tied to earlier efficiency-driven layoffs promoted by Elon Musk’s advisory board within the Department of Government Efficiency. A new shutdown would compound these pressures. n nDuring previous closures, non-essential personnel were temporarily sent home but later reinstated. Trump’s statement during an NBC News interview—that “we are going to cut a lot of the people that … we’re able to cut on a permanent basis”—signals a potential departure from that practice. Nomura economist David Seif observed that this could lead to a more pronounced effect on the October employment report, expected in November, compared to prior episodes. n nAnother concern involves the interruption of critical economic data collection. The Labor Department announced it would suspend nearly all operations during a shutdown. This includes the Bureau of Labor Statistics (BLS), responsible for publishing vital indicators like the monthly jobs report and inflation metrics. Delays and potential declines in data accuracy are anticipated under such circumstances. n nA postponed consumer price index (CPI) release could affect cost-of-living adjustments for Social Security beneficiaries. Additionally, the Federal Reserve relies heavily on BLS data when setting interest rates and shaping monetary policy. Mark Cabana, head of rates strategy at Bank of America, cautioned that an extended closure would force policymakers to depend on alternative private-sector data sources, potentially affecting decision-making precision. n nPrecedent exists: during the 2013 shutdown, the September jobs report was delayed until October 22, and the CPI release was pushed back by two weeks. n nElizabeth Renter, senior economist at NerdWallet, echoed Wall Street assessments that overall economic damage may remain modest. Still, she emphasized the immediate hardship faced by furloughed workers and government contractors. “When households lose income, even briefly, their financial resilience can suffer significantly,” she stated. n— news from CNBC
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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. n nThis time, though, could be different. n nThat ‘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. n nShould 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. n n”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.” n nIndeed, shutdowns in the past have left little mark other than the political damage done to the party perceived as at fault. n nMarkets 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. n nHowever, 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. n nShutdowns 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.” n nThe 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. n nBut that brings up another wrinkle: Should the shutdown last any significant amount of time, it could delay the release of key economic data. n nThe Labor Department said Friday it will shut down virtually all activity. The department ‘s Bureau of Labor Statistics, which releases multiple key economic reports including the monthly jobs count, would be shuttered as long as the shutdown lasts. In an action plan to address the situation, the department warned of delays and also said a “reduction in quality” for the data could occur. n nFor Social Security recipients, a delay in the release of the consumer price index inflation reading could impact cost-of-living adjustments. n nThe 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. n n”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.” n nOne 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. n nElizabeth 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. n n”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.”