The Costs of a Government Shutdown

It’s the third week of the government shutdown, and a resolution doesn’t seem to be presenting itself any time soon. The partial shutdown – which has resulted in the closure of nine out of 15 federal departments, as well as dozens of agencies and federal programs1 – has already started a snowball of economic effects in the U.S., with some analysts estimating that shutdown-related costs have already exceeded $5 billion.2

 

The U.S. has experienced 21 shutdowns since 1976, with some shutdowns lasting only hours or a couple of days before resolving. The longest shutdown lasted 21 days, happening between December 16, 1995 to January 6, 1996 under former President Clinton.3 The current shutdown will break that record if it lasts through January 12.

 

Right now, about 800,000 federal employees are affected, with about half not reporting to their jobs due to closures and half working without pay.4 Furloughed employees are likely feeling the squeeze as they miss their first paychecks.

 

While federal employees feel the pinch personally, the economic cost of a shutdown to every taxpayer is high. Some of the costs are felt immediately, while others will affect future economic growth. Here are just a few of the ways the U.S. economy is impacted by a shutdown.

 

  • Federal aid is locked up. States rely on federal grants and aid to provide nearly 30 percent of revenues.5 Certain industries who rely on federal funds to conduct business are in a state of limbo. For instance, farmers are hit by the shutdown, who usually spend this time of year applying for assistance and planning for next year’s crops.6 Lack of access to funds will affect crops – and farmers’ income – down the road, leading to a ripple effect in rural areas.

 

  • Furloughed employees don’t spend. If you don’t have money coming in, paying bills is first priority – and even meeting those obligations can be a challenge. Spending on non-necessities? Not happening. Retailers feel the hit from lack of spending; it’s an especially tough blow for small businesses, who don’t have as big of cushion to fall back on as national retailers. And speaking of small business…

 

  • Business loans are halted. Business loans get put on hold during a shutdown. The Small Business Administration (SBA) is included in the shutdown, so no new loan applications are currently being accepted.7 Applications submitted in December, before the shutdown started, are on hold. Many businesses are turning instead to banks and may have to wait longer for answers as banks work through an increased workload of loan applications. Funds from the loans would normally be used for capital expenditures and growth of the business, and delay in receiving funds hinders that growth for both the business and the local economy.

 

  • Businesses in regulated industries must wait. Certain regulating industries are closed during the shutdown, directly affecting the businesses that work with them. For example, craft brewers must wait until the shutdown is over to get approval for new beer labels from the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF).8 While the Securities & Exchange Commission (SEC) is technically still open, it is operating with reduced staff and response times are slower.9

 

  • Museums, parks and other attractions lose revenue. Some national attractions are closed during the shutdown, resulting in a lack of income. For example, many museums rely on earned revenue – such as gift shop and concession sales – as part of their annual operating budgets. Reduced income may result in the reduction or elimination of educational programs provided by these institutions.

 

  • The jobs report can be negatively impacted. The monthly jobs report is based on information gathered by the U.S. Bureau of Labor Statistics over the pay period in the middle of the month.10 If this current shutdown persists, most of the 800,000 furloughed employees could be counted as unemployed – and January could be the first month showing a decline in jobs since September 2010.11 While this information isn’t directly related to dollars in and out the U.S. economy, it is used as a barometer of overall economic health.

 

[1] Brad Tuttle. Money. Jan. 4, 2019. “The Government Shutdown Will Cost More Than Trump’s $5 Billion Border Wall Funding, According to Experts.” http://time.com/money/5494004/government-shutdown-costs-trump-border-wall/  Accessed Jan. 7, 2019.

2 Ibid.

3 Abigail Abrams. Time. Jan. 7, 2019. “This Is Now the Third-Longest Government Shutdown in U.S. History.” http://time.com/5494109/shutdown-third-longest-us-history/  Accessed Jan. 7, 2019.

4 Ibid.

5 Leandra Bernstein. WJLA. Dec. 17, 2018. “A government shutdown could cost the U.S. economy billions.” https://wjla.com/news/nation-world/government-shutdown-cost-economy-billions-trump-border-wall  Accessed Jan. 8, 2019.

6 P.J. Huffstutter. Reuters. Jan. 3, 2019. “As loans and aid dry up, U.S. farmers face fresh challenge from shutdown.” https://www.reuters.com/article/us-usa-shutdown-farmers/as-loans-and-aid-dry-up-u-s-farmers-face-fresh-challenge-from-shutdown-idUSKCN1OX1UB  Accessed Jan. 8, 2019.

7 Adam C. Uzialko. Business News Daily. Dec. 26, 2018. “How a Government Shutdown Hurts Small Businesses.” https://www.businessnewsdaily.com/5235-government-shutdown-hurting-small-businesses.html  Accessed Jan. 8. 2019.

8 Jim Tankersley, Matthew Goldstein and Glenn Thrush. The New York Times. Jan. 7, 2019. “As Government Shutdown Persists, Americans Feel the Bite.” https://www.nytimes.com/2019/01/07/us/politics/govenment-shutdown-impact-effects.html  Accessed Jan. 8, 2019.

9 Meghan Morris. Business Insider. Dec. 26, 2019. “The government shutdown hits the SEC starting Thursday – here’s how it’s impacted.” https://www.businessinsider.com/how-sec-affected-by-partial-government-shutdown-2018-12  Accessed Jan. 8, 2019.

10 Lydia DePIllis. CNN Business. Jan. 8, 2019. “How the shutdown could affect the January jobs report.” https://www.cnn.com/2019/01/08/economy/january-jobs-report-shutdown/index.html  Accessed Jan. 8, 2019.

11 Ibid.

 

This content is provided for informational purposes only. The third-party information and opinions contained herein, have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by AE Wealth Management.

FOR INVESTMENT PROFESSIONAL USE ONLY – NOT FOR USE WITH CLIENTS OR THE PUBLIC.

707473

 

 

Posted in ,

webteam

Leave a Comment