Government Shutdown Begins Amid Uncertainty
A few hours ago, at 12:01 EDT, the government shutdown officially started. Since Trump’s previous term, which ended on December 1, 2018, there hasn’t been much clarity on who might negotiate a stopgap bill for government funding. The last shutdown, which lasted 35 days, left many wondering if this one could drag on for even longer. Currently, the immediate impact on financial markets seems limited; the S&P 500 climbed by 0.4%, with the Treasury yielding just 1 basis point over two years. The previous shutdown between 2018 and 2019 was estimated to have reduced GDP by 0.1% quarter-over-quarter in Q4 of 2018 and another 0.2% in Q1 of 2019 due to its effects on workers.
It’s interesting to note that there might be differences this time around, particularly if the shutdown extends. For one, Trump, now in his second term, seems more determined to push his agenda, which has been more aggressive than before. He might be less inclined to compromise compared to past negotiations. Additionally, instead of abandoning officials, he has hinted at firing them. In the 2013 shutdown, about 850,000 workers were affected during a 16-day hiatus, while 800,000 were impacted in 2018-19, including those forced to work unpaid. The 2013 situation was perceived as hitting more workers than the earlier instance. This shutdown could have a similar scope, but this time, the White House’s Management and Budget office could follow through on threats and consequences.
Consequently, the market is keeping an eye on the potential risks tied to this aggressive stance. The economy seems more fragile now compared to 2018-19. For instance, payroll growth during the October 2013 shutdown averaged 204,000, while during the 2018-19 period, it was only 146,000. Currently, the six-month average has dropped to just 64,000, which could mean a new wave of unemployed people entering a weaker job market. Consumer confidence appears to be fragile as well; while it was at 136.4 in November 2018—close to record highs since 2000—it stood lower in 2013 at 94.20. As it stands, the average over the past decade has been around 110.20, suggesting a decline in confidence over time.
If Trump decides to prolong this shutdown and follows through on laying off workers, the likelihood of rate cuts in the market might increase, especially in October and December.
US consumers are feeling the pressure—stocks may not come to the rescue.
