The autumnal equinox has passed, marking the official start of fall. Along with the changing weather and the prevalence of pumpkin spice, there is also the looming possibility of yet another government shutdown in the United States.
As we approach October 1st, the start of the federal government’s new fiscal year, there is little expectation that Congress will reach a compromise and pass a plan to keep the government open.
A lack of consensus among House Republicans on a continuing resolution for spending has eroded confidence in lawmakers’ ability to reach a deal. The challenge lies not only within their own party but also in finding common ground with the Senate.
Government shutdowns have become all too familiar in American politics, driven by partisanship and grandstanding. However, they tend to have minimal impact on markets. Shutdowns are relatively common, usually short-lived, and generally limited to nonessential services. Once operations are back to normal, furloughed employees are paid in full.
“While the term ‘shutdown’ may sound ominous, previous government shutdowns have had no material impact on the economy,” according to Sevens Report Founder and President Tom Essaye.
That being said, it is not to say that it will be a complete non-event. Historical data from the past 19 government shutdowns indicates that the S&P 500 typically declines in the week leading up to a shutdown. Interestingly, this pattern has become more pronounced since 1995, according to analysts at Société Générale.
Surprisingly, the anticipation of a shutdown often outweighs its actual impact. In fact, during past shutdowns, the S&P 500 has rallied on average by 2.3%.
Economist Stephen Gallagher of Société Générale expects this year’s shutdown to be relatively short in duration, further lessening its effect on the markets.
The Impact of Government Shutdown and Labor Strikes on the Economy
This year, the United States has been dealing with multiple challenges that are causing significant disruptions. Besides the potential government shutdown, there are three major labor strikes happening across the country. These strikes involve prominent unions such as the Writers Guild of America, SAG-AFTRA, and the United Auto Workers.
While the economic consequences of these strikes may not be substantial, they do affect a small portion of the workforce compared to the overall economy. However, a decline in automobile production could potentially cloud near-term economic data.
According to analyst Essaye, this is where the real concern lies. While the strikes may not be substantial enough to derail the economy, they do obscure important trends and information that the Federal Reserve relies on for a clear understanding of the economy.
The impact of both the government shutdown and labor strikes on the data is threefold: it reduces availability, reliability, and accuracy. A government shutdown may result in a lack of produced economic data, including the crucial jobs report. Similarly, the strikes will skew near-term economic data.
In simpler terms, think of the Federal Reserve as trying to land a plane smoothly for the U.S. economy. A government shutdown would cause partial instrument failure, while strikes make it difficult to see clearly due to fog.
Although landing a plane in fog is not impossible, few bullish investors would want to make the Federal Reserve’s balancing act even more challenging at this moment. While the lack of data might make the central bank slightly more cautious in the short term, it is unlikely to alter its overall outlook of maintaining higher interest rates for a longer duration.
Using another metaphor, one could argue that the government shutdown and labor strikes could end up being a tempest in a teapot. Nevertheless, some investors may still be left with a bitter taste in their mouths.
