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The political temper tantrum known as the government shutdown is now a week old, the rhetoric is heating up, and there’s no sign that the peace pipe will be smoked anytime soon.
While the politicians at the top of this heap continue to be rewarded with their government paychecks, more than 2.1 million government workers do not. Some 800,000 Uncle Sam employees were initially furloughed (although 350,000 from the Defense Department were just called back), and another 1.3 million will most likely see their paychecks delayed.
And don’t forget the private-sector contractors that sell goods and services to the government – to the tune of $300 billion annually. For defense contractors, drug suppliers, travel agencies, and a wide variety of industrial contractors and suppliers, that means no sales, no paychecks.
History shows us that in a normal economy – and if the government shutdown is short term – the effects on the overall economic health of our nation and stock market would be minimal. There have been 17 government shutdowns from 1976 to 1995, and most had a brief, negligible effect on the economy.
But in 1995, the 21-day government shutdown cost the federal government $1.5 billion, or $2.1 billion in today’s dollars. Research firm IHS estimated that this current shutdown is costing us about $300 million a day. And Goldman Sachs projects that gross domestic product will be reduced as much as 0.9% if the shutdown lasts three weeks.
But the government shutdown’s long-term effects are much more far-reaching.
The fact is, we are not in a normal, or healthy, economy…
Watch as Keith Fitz-Gerald tackles some of the long-term economic issues we’ll face, thanks to our closed government.
Economic Effects of a Government Shutdown
The unemployment rate – as of August – still remains at a stubborn 7.3%. Of course, we don’t know what September’s rate was, because the folks calculating those numbers are on furlough.
But any prolonged uncertainty is likely to put the brakes on new hiring, as companies will lose the small bit of confidence they now have and feel obliged to rein in any unnecessary spending.
In a study by the Business Roundtable, one-half of managers responded that the squabbling over the shutdown and upcoming debt ceiling would “have a negative impact on their plans for hiring additional employees over the next six months.”
And then there’s housing…
Housing, while recovering, still remains weak in certain areas of the country. A lengthy shutdown could possibly derail the gains we’ve made. Already, the mortgage market is feeling the pinch. With most of the Internal Revenue Service taking an enforced holiday, there’s no one to verify the income of potential home buyers.
A few more days of the shutdown and government-backed loans won’t be funded. That means those folks who need Federal Housing Administration, Veterans Affairs, U.S. Department of Agriculture, or Tennessee Housing Development Agency loans will be out of luck. And if they can’t get loans, guess what? They can’t buy houses. That will ultimately affect builders, their suppliers, home inspectors, home furnishing businesses, real estate firms, termite companies, and even your local handyman.
The automakers are not happy, either. This year, the industry was projecting a 7% increase in auto and truck sales, to 15.5 million units, the best year since 2007. But, hey, if you don’t have a job, you’re not going to buy a new vehicle, are you?
Nor will you feel like playing Santa. As much as 40% of retail sales are booked in November and December. This year, the National Retail Federation expects holiday sales to increase by nearly 4% this year, to $602.1 billion.
That may not happen, if the shutdown persists.
The retail order/lead cycle is about three months, so most retailers already have their holiday orders in the process. But what happens if all those electronics coming from Asia can’t get into the ports because of furloughs of customer inspectors? And then, even if those DVD players, headphones, and televisions do make it into the country and onto the shelves, who’s going to buy them?
We’ve already seen the near-term effects on the travel and leisure industry. More than 400 national parks are shut down. When that happened in 1995-1996, the Congressional Research Services reported that more than 7 million visitors were turned away. That amounts to millions of dollars of revenue lost each day. And certainly, if your paycheck is delayed or you don’t get one at all, you might cancel your holiday travel plans.
Finally, Washington shenanigans can have a profound effect on the markets.
Government Shutdown and the Markets
In the shutdown of 1995-1996, the S&P 500 fell 3.7%, according to S&P Capital IQ. The debt ceiling fight in the summer of 2011 resulted in a downgrade to U.S. debt, causing the stock market to slide 14%, nearly 1,700 points. And 2012’s fiscal cliff uncertainty saw the Dow fall 3.1%, or 400 points, in just 10 days.
Expect more of the same in a prolonged shutdown. The industries I mentioned will see their stocks retreat. And those are the types of sectors where discretionary spending has been strong, propping up earnings – and stock prices – this year.
Just look at the numbers of this year’s market returns per sector, from Morningstar:
Those returns may disappear if the shutdown goes on for longer than a couple of weeks.
The government shutdown also could disrupt the best IPO market since 2007. Initial public offerings (IPOs) – like the potential blockbuster from Twitter – will be delayed. Why? Because the U.S. Securities and Exchange Commission will have a much leaner staff and may even temporarily close its doors.
This year’s IPO market has made great strides since the recent recession, when just 38 companies debuted in 2008 and 61 in 2009. 2012 saw 128 companies go public, and through the first quarter of this year, 166 businesses began issuing stock.
That’s still a significant decline from the IPO heyday of 1991-2000, when an average of 530 businesses a year became publicly traded companies, and a market decline could easily pop that bubble.
This sounds like gloom and doom, doesn’t it? And it may very well be – in the short and intermediate term. Certainly, the shutdown will eventually be resolved, and the government will resume its business, but we may have some pain in the meantime.
In today’s fledgling economy, the uncertainty and low consumer confidence might just take a greater toll on the market, creating a reluctance from both consumers and businesses to open their pockets quickly. Once that confidence is eroded, it may take some time to snap back.
Plus, it’s not just the government shutdown we’re dealing with from Washington…
While the 1995-1996 government shutdown saw a quick 10.5% rise in the S&P 500 after the government went back to work, the stock market didn’t snap back for five months after the 2011 debt ceiling debacle. U.S. Treasury Secretary Jack Lew said last week the United States will hit the debt ceiling by Oct. 17. So, investors may need to hold onto their seats.
Bottom line: You may want to take the opportunity to exit some of the above industries. You can plan on buying them back, once the dust has settled.