Why This Government Shutdown May Hurt Economy, Stocks More Than Usual
Government shutdowns always have been primarily over government spending, but this one will be mostly over an ideological divide on immigration, with budget issues playing a secondary role.
That raises the risk that the partial government shutdown could be a long one and have more serious economic consequences than investors expect.
Senate Democrats blocked a Friday night effort to fund the government for a few weeks, leading to a partial shutdown at midnight Eastern.
The Dow industrials, S&P 500 index and Nasdaq composite rose on the stock market today, with the S&P 500 and Nasdaq hitting all-time highs. Meanwhile, the 10-year Treasury yield hit a three-year high of 2.64%, hardly a sign that markets are bracing for a negative economic shock.
If this looked like a run-of-the-mill government shutdown, the undaunted market response would make perfect sense. Typically, a government shutdown is a fleeting event that leaves no economic scars. That’s still possible, and given the robust state of the U.S. economy entering 2018, a shutdown should be of even less concern at the moment.
Yet this fight looks potentially more disruptive because one or both political parties will have to give ground on an issue that has deep significance to their core supporters.
Democrats have seized upon President Trump’s explosive remarks during a meeting over the future of so-called Dreamers last week in which he took issue with legal immigration from Haiti and from African countries, which he is alleged to have denigrated using an expletive. They think this is their best shot politically to force Trump’s hand to provide certainty to some 800,000 immigrants who arrived in the U.S. without authorization when they were children.
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Trump, as well as many Republicans, have expressed openness to, even desire for, a deal on Dreamers. But Trump has given plenty of mixed signals and has made clear of late that any deal granting continued legal status or perhaps citizenship to Dreamers has to come at a price. That price is building a wall covering a substantial portion of the Southern border, which was the most central of Trump’s campaign pledges.
Backing down from that demand now could seriously wound Trump’s standing among hard-line immigration supporters. Yet Democrats, if they stay united — which is no sure thing in an election year that has 10 Democratic senators standing for reelection in states carried by Trump — would leave the White House in a pickle, either give up the wall or watch the economy suffer through an extended shutdown.
The 2013 shutdown was estimated to cut 0.3 percentage point from fourth-quarter GDP growth. That shutdown lasted 16 days, before House Republicans backed down from their insistence that the Affordable Care Act be defunded.
That shutdown saw 850,000 federal workers furloughed, for a total of 6.6 million lost workdays. Work also was interrupted for hundreds of thousands of private-sector employees working for federal contractors.
Eventually, the furloughed workers received back pay for work they didn’t perform — about $ 2 billion worth — and the economy marched onward. The problem would come if a shutdown is drawn out for significantly longer.
A number of Wall Street firms only expect the tax cuts to boost growth by about 0.3% this year. If that’s right, then a shutdown would reverse most or all of the gain from tax cuts for as long as it continues.
That’s about the last thing President Trump wants right now, so an extended shutdown probably won’t happen. But this time, it can’t be ruled out.
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