U.S. Government Shutdown: Update

With a U.S. government shutdown proceeding as expected on October 1, markets are preparing for the potential delay of critical economic data, including Friday’s nonfarm payrolls report for September. Economic and financial market effects could be modest based on prior shutdown episodes. The duration of the shutdown remains uncertain.  

The furlough will likely involve all non-essential federal employees, making the 2013 government shutdown a useful parallel. However, unlike 2013, this latest Congressional impasse over appropriations does not coincide with a debt-limit issue. As a result, we do not need to worry about the government “defaulting” on its obligations, which was a genuine concern in 2013 because of the broader implications for markets.

Why has the shutdown occurred?

• Lawmakers have failed to agree on an appropriations bill to keep the government running, resulting in a shutdown.  
• This is the first time since 2018 that a shutdown has occurred. That episode lasted just over a month.

What is the impact on economic data releases?

• It is likely that the Bureau of Economic Analysis (BEA) and the Bureau of Labor Statistics (BLS) will be furloughed. During the 2013 government shutdown, two monthly employment and CPI reports were rescheduled, disrupting economic data releases for the rest of that year.
• The most immediate impact would be on the October 3 jobs report. If the shutdown is brief, the Federal Reserve could have payroll numbers before its policy meeting on October 28–29. Weekly jobless claims data could continue to be released, given they are at the state level. Private sector data, such as the ADP monthly employment report, will be watched more closely if BLS payroll data are not published, and Fed policymakers will likely lean on their own ADP analysis even more heavily.
• If CPI data are not released at the end of October, the Treasury Department is expected to announce a replacement index for TIPS and CPI swap pricing based on recently reported inflation values. Once the shutdown ends, the data will be released with a lag.

What is the economic impact of a government shutdown?

• A shutdown would reduce real GDP growth by around 10 to 20 basis points per week, based on analysis of previous shutdowns in 2013 and 2018. With federal employees likely being furloughed, the loss of income may alter spending patterns of those affected. Additionally, government contract payments may be deferred, slowing down government spending.
• However, as furloughed workers are typically compensated for lost income once the government reopens, historically a rebound in growth has usually been observed immediately after the shutdown ends. This retroactive pay, however, requires congressional approval and is not guaranteed.

Q. What is different from previous shutdowns?

• This shutdown is potentially different because of the threat to eliminate government positions. While that uncertainty is very important to the employees directly affected, it is difficult to predict whether the outcome would have a significant effect on financial markets. 

 Q. What should investors do in this uncertain political and economic environment?

• Historically, these shutdowns have not had a lasting negative effect on markets. We believe investors should stay focused on their long-term investing goals—such as retirement or college—and have an appropriate and broadly diversified asset allocation. This is preferable to attempting to time the markets or make portfolio adjustments every time the market gyrates. Reacting to short-term market events could derail your long-term investment goals.
• Before making any significant strategy changes, it would be prudent for investors to review their portfolios to determine if the allocations reflect their tolerance for volatility and the time horizons of their financial goals.

How is T. Rowe Price responding?

• We continue to monitor events and their implications.