The current government shutdown is now the longest on record, surpassing the 21-day record set but the shutdown in 1995. It’s the seventh “big” shutdown on record, referring to shutdowns that last for ten or more days.
This shutdown has impacted about 800,000 federal workers as well as an unknown number of contractors. Since there are millions of contractors supporting the federal government, I wouldn’t be surprised if 200,000+ of them were without pay, bringing the total number of impacted workers to a million or more. Federal workers historically receive backpay, while contractors historically do not.
According to research compiled last year by LPL Financial, the largest independent broker-dealer in the United States, government shutdowns historically have mostly been non-events for the stock market. The market is historically relatively flat during government shutdowns.
Since the market goes up a lot more than it goes down overall, the fact that it only goes up 44% of the time during shutdowns, and that the average return is mildly negative, shows that shutdowns probably do historically have a mild negative influence on stock market returns during their duration. However, there has never been a big crash or major decline during a shutdown.
This makes sense because essential services keep operating during a shutdown, and they have all previously been three weeks or less in duration. Most of the public sees little or no direct effects of a short shutdown where essential operations stay online, and many of the shutdowns have been so short that federal workers never even miss a paycheck.
Since this current shutdown is the longest on record and still growing, we’re in uncharted territory going forward.
While there is little short-term impact to the public so far, shutdowns result in lost long-term productivity for the federal government. With maybe a million people not working for three weeks, at 40 hours per week that’s 120 million lost hours of work. Assuming their average labor is worth $50/hour as a back-of-the-envelope calculation, that’s $6 billion in lost productivity so far as a rough order of magnitude, and another $2 billion lost every further week. On top of that, there is additional administrative burden from stopping and starting government operations, overtime pay to fix backlogs once the government is re-opened, and other sources of financial friction.
The majority of Americans live paycheck to paycheck, and that includes a large percentage of federal employees and contractors. With perhaps a million people out of work, and several million people directly impacted when their families are considered, this will become a big problem if it persists for too long.
In any given month, the stock market considers a good monthly jobs report to be one that adds 200,000 jobs or so to the market. A million people out of work temporarily erases about five months of good jobs reports.
However, the true impacts of a long shutdown are potentially exponential rather than linear. If it drags on for months, money for food stamps and low-income housing support may go dry. There are millions of families that receive federal rent support and tens of millions of people that rely on food stamps. A prolonged shutdown could therefore impact the economy in a major way, and the instability could very likely result in another sell-off in the stock market.
Additionally, the Securities and Exchange Commission is not able to process initial public offerings (IPOs) for companies during the shutdown. The SEC will have a large backlog when the government opens, which could delay new IPOs from coming to the market.