As the Federal Reserve gears up for a crucial meeting this week to determine interest rates, economic indicators are becoming increasingly murky due to the ongoing government shutdown, which now stands as the second-longest in U.S. history. Since October 1, hundreds of thousands of federal employees have been furloughed, while numerous government services have been suspended. The deadlock stems from an inability of Democrats and Republicans to agree on a budget for the new fiscal year.
Economists are raising alarms about the potential long-term impacts of this shutdown on the nation’s economic health. Andrew Hollenhorst, chief economist at Citi, expressed concerns that the prolonged nature of the shutdown could instigate “more permanent effects on the economy.” The shutdown has led to decreased spending among unpaid government workers and contractors, which many predict will adversely affect the Gross Domestic Product (GDP) in the fourth quarter. JPMorgan has estimated that each week the government remains closed shaves approximately 0.1 percent off GDP growth.
Although analysts suggest that much of the economic loss could be recovered in subsequent quarters once the government reopens, they warn that a portion will be permanently lost. The longest shutdown on record, which occurred from late 2018 to early 2019 over former President Donald Trump’s border wall debate, resulted in an estimated GDP loss of $11 billion, with approximately $3 billion not recouped.
Federal Reserve Governor Christopher Waller noted that if the shutdown is short-lived, it could lower GDP growth by several tenths of a percentage point in the fourth quarter but may increase it by a similar margin in the following quarter. However, he cautioned that a prolonged shutdown could yield a more significant drag on fourth-quarter growth, as well as a diminished recovery.
The White House has hinted at using this shutdown as an opportunity to reduce the federal workforce, a move that some analysts warn might further hinder economic growth. Vincent Reinhart, a former Fed official now at BNY Investments, remarked that past government shutdowns had become less disruptive over time but expressed concern about the potential for a reduced government size leading to longer-term economic ramifications.
Compounding these issues is the Fed’s upcoming meeting of the Federal Open Market Committee, during which a 25-basis-point rate cut is anticipated. Recent signals from senior Fed officials suggest they possess sufficient evidence of a weakening labor market to justify this move, bolstered by a recent inflation report. However, the shutdown poses significant challenges for policymakers, as it has hindered access to essential economic data. A monthly jobs report for September remains unreleased, and future reports, including one for October, are also in jeopardy.
David Wilcox, a former Fed official, articulated the difficulties faced by policymakers, likening their situation to driving with a blurry windshield due to the unavailability of key data points. This lack of information increases the risk of making decisions that may not align with the realities of the economic landscape.
Investors are feeling the pinch as well, forced to rely increasingly on private market data for economic insights. Russell Brownback of BlackRock noted that while the firm has not significantly altered its investment strategies due to the shutdown, entities without the same resources may face considerable challenges. Furthermore, when government operations resume, the rush to compile historical data could lead to inaccuracies.
Gregory Faranello from AmeriVet Securities warned that the longer the shutdown continues, the more likely it is that forthcoming economic data will be deemed questionable in quality. As government staff return to work, they will face a daunting task ahead, and the resulting data could ultimately reflect the chaotic nature of the shutdown period.
