This latest United States Government shutdown, the longest on record has had an unprecedented impact on federal workers across the US. While politicians from both parties failed for weeks to even agree to negotiations to end the shutdown, as over 800,000 went workers are without pay, with tens of thousands of more that are employed through contractors also out of pocket.
While much of the attention has understandably been upon the plight of these works and their struggles, more recently banks and investors have been sounding the alarm regarding the economic risk this shutdown is posing, not only to consumer spending but also dozen of industries that require government approvals to proceed with their day to day activities. The Securities and Exchanges Commission (SEC) which regulates stock markets in the US is currently mostly shut down, preventing new companies from launching onto the stock market in initial public offerings (IPOs). Big names such as Lyft and Uber have both had their IPOs delayed and possibly even put on hold for the year as a whole. Key trading and investment firms predict this will affect their bottom line for the whole year.
The Federal Aviation Authority (FAA) which regulated all air travel and oversees the approval of planes has been forced to stop new authorisation due to the shutdown, meaning that dozens or airlines have new planes that they cannot use. This not only has a cost in terms of lost profit, but also the storage cost for these planes while they are on the ground. Some of these planes are currently even grounded in foreign countries after maintenance and refits adding more to the costs. This is all occurred alongside the concerns surround unpaid air traffic controllers and TSA workers calling in sick in record numbers, in turn leading to record delays in airports nationwide. The overall impact of passengers missing their flights will be mostly unquantifiable, but the lost revenue for airlines has resulted in first quarter profit warnings.
The shutdown has now dragged on long enough for big business names such Jamie Dimon, CEO of J.P. Morgan Chase, one of the largest banks in the US to sound the alarm. Dimon has warned that if this shutdown had continued it could stall the US economy and wipe out an growth for this quarter. This is coupled with warnings from analysts saying that the delayed IPO’s and approvals for businesses which could see the ramifications from this shut down stretch out for months. This of course, optimistically presumes that agencies involved in issuing approvals can get back up to speed on day one back at the office.
This underscores the impact even a supposedly hands off Government has on the economy. The extent of this impact is made even more shocking when one considers that only an estimated one quarter of the Federal Government was actually shut down this time.
Currently the single biggest economic risk from the shutdown emerges from the unpaid contractors. Unlike federal workers who are guaranteed back pay from the Government as the Government cannot have employees work for free, third party contractors who are missing pay-checks as a result of their projects being defunded are not guaranteed to be paid. Some big names in aerospace and defence have privately expressed concern that projects that they are paid to run for the Federal Government have or are just about to run out of funding. If that is the case they will need to either redeploy the workers involved or lay them off.
All of these issues can individually be managed and planned for by businesses, many have already adjusted their expectations for the quarter and are making plans for lower revenue levels. Many small businesses that relied on the Federal Government being open won’t recover though. Coffee and sandwich shops that usually feed hungry workers streaming out of Federal office buildings are taking a massive hit that could be catastrophic. Cleaning services and couriers that ferry documents between departments are all stuck without business. These small businesses are the backbones of local economies and the damage they’ve suffered could have be long lasting.
However, even big businesses can only handle so many shocks to their plans before it starts to eat into their bottom line. Most have already hit their limit and warn that any further shocks such as a hard Brexit or a resumption of a trade war between China and the US could turn what is a minor speed bump in economic growth into a full blown recession.
Normally market watchers would pay close attention the economic data coming out of the Federal Government to get some picture of the impact that these workers missed pay-checks would have, but because the Department of Commerce has been closed, no stats for anyone. This left marker traders (the same ones sounding warnings about the impact of the shutdown) flying blind in their predictions regarding the overall health of the economy.
At the end of the day this shutdown was a political problem, albeit one that has and is still having a drastic effect on the business community. Even now that is has temporary being resolved, many businesses are no doubt nervous of the prospect of additional shocks to this system. Just last week in Davos, 30% of CEOs reported that they had a negative growth outlook for the coming year. That figure was only 5% last year.
After a shock like a shutdown business leader will seek certainty to restore confidence, but will find it in short supply.
By Aaron Bowman – CoEditor