In October, the U.S. Government operated under a partial shutdown for 16 days. During that time only those federal employees determined to be essential were working. Up to 850,000 federal workers were sent home to wait for an agreement between Democrats and Republicans. National parks were closed. Economic reports were delayed. Consumers were worried. Investors were . . . optimistic?
From October 1st – October 16th, the time period when the federal government was shutdown, the S&P 500 gained 2.38 percent. This was a shockingly positive outcome in what might have been viewed as a dire financial situation. Let’s put the number in perspective. If it were somehow possible for the stock market to continue at that 2.38 percent rate for an entire year, the annual return would be 63 percent. We all know that would be absolutely crazy and it raises some questions.
Why is it important to look at the impact now that the shutdown is over? The current law, passed on October 16th, only keeps the government running until January 15, 2014. In other words, another shutdown could be right around the corner. (The debt limit is expected to be reached on February 7, 2014.)
Why were investors feeling so good during the shutdown? The main reason is likely to be that Wall Street always assumed that the shutdown would be temporary. Eventually politicians would come to an agreement. According to the Washington Post there were similar halts in government services in 1995, 1990, 1987, 1986, 1984, 1983, 1982, and 1981.
Did the shutdown save the government money? This one is simple: no. In fact, it cost extra. Furloughed workers were given pay for every day they did not work. That added up to around $2 billion. For example, national park employees were paid even though there was no revenue from visitors. Zions National Park in Utah missed out on approximately 72,000 visitors during the first ten days of closure.
Local governments also took a hit, Utah in particular. The state agreed to send $1.67 million to the federal government to reopen national parks inside the state. It was worth it since the local communities estimated revenue of over $100 million in areas around these parks. As of the time this article was written, the federal government had not paid back the state.
How did consumers react to the halt? Consumer confidence dropped significantly during the shutdown. However, they did not put their money where their mouth was. According to Thomson Reuters, retail sales increased by 3.7 percent in October (compared to October 2012). That would normally be considered good. In light of the shutdown, 3.7 percent seems strong.
Did the shutdown hurt the economy? The overall cost of the shutdown to the U.S. economy has been estimated at $24 billion (source: Standard & Poor’s). How bad is that? It is a little more than one tenth of one percent of GDP—just enough to show up in the numbers when quarterly annualized numbers get reported. However, the long term impact on economic opportunity seems muted. The energy renaissance in the United States continues. Consumers kept spending in October on homes, cars, iPhones, and whatever else they needed. They are likely to do the same in November and on into the future. All these will help job creation to continue just as it has all year.
Will we have another shutdown? The most likely answer is yes. Hopefully it does not happen in 2014. The political fallout alone may be incentive enough to avoid a February shutdown. Recent history tells us that the market will expect a deal and consumers will keep spending no matter what. Therefore, it is safe to conclude that while the possibility of another
shutdown is scary, a short shutdown may not be as negative in the long term to investors. Of course, there is no guarantee.