US Watch – Government shutdown adds labour market noise
This morning, the US government went into shutdown. Democrats and Republicans couldn’t agree on a bill funding government services beyond October. Even though Republicans control Congress, their slim majority is insufficient for to pass the 60-vote threshold needed in the Senate. Democrats used this leverage to try to improve healthcare access for Americans, by demanding an extension of tax credits on health insurance set to expire in January, and to reverse some OBBBA cuts to Medicaid and various health agencies. Republicans refused to comply, and no resolution was found before the funding deadline expired.
Government shutdowns tend to be short-lived, lasting a couple of days, until the pressure builds sufficiently to find concessions. The latest, and longest, shutdown was a 35-day shutdown during Trump’s first presidency, caused by a funding disagreement for the border wall between the US and Mexico. Ultimately, Congress reached a compromise with some, but not complete, funding for the wall. Similarly, we expect some concessions to be made on healthcare in the coming weeks. Trump has already said he looked favorably at some measures to protect access to healthcare in rural areas.
What is the impact of the shutdown on the economy?
Federal Reserve research suggests that each week of shutdown cuts 0.2 percent from GDP growth, but that this is reversed at the same pace when a shutdown ends. The timing at the start of the quarter suggests that the impact on headline growth figures will be limited.
Usually, during a shutdown, part of the federal government goes into furlough. If the shutdown persists for a couple of weeks, these government workers might officially be counted as unemployed in the household survey, risking a temporary rise in the unemployment rate. In the establishment survey there will be no impact, because they will eventually be paid. In the basecase it will therefore not be reflected in non-farm payrolls. The curveball is the fact that the Trump administration is threatening to permanently fire furloughed workers, conveniently using this government shutdown to push through some of their policy intent.
Based on the amount of Federal workers at risk of being put in furlough, the unemployment rate could rise by up to half a percentage point in October, reverting back once the shutdown ends. The bounce-back could be partial in case of permanent dismissal. Interestingly, the BLS is part of the agencies that will be put in furlough, which means we might not even get to see all this data in real time. If the government is still shut down at the time of the surveys, they might simply not be conducted. This will mostly hit the household survey and the unemployment rate, with the establishment survey likely less affected due to payroll records.
In short, the government shutdown is expected to be a temporary inconvenience with little to no permanent damage to the economy. If the shutdown lasts a few weeks again, the dynamics are likely to add noise to already difficult to interpret labour market data, which will also affect the Fed’s decision making process. If the Trump administration takes the opportunity to fire large swaths of government workers, it would not be just noise; the unemployment rate would rise noticeably.