It finally happened Monday night. After weeks of discussing the possibility of a government shutdown, the US government came to a standstill over the Affordable Healthcare Act and the budget, forcing governmental agencies to shutter doors and not pay employees on Tuesday. The shutdown impacts the Department of Defense most, where 400,000 workers out of the total 800,000 on leave are employed. The Department of Energy, Department of Commerce, and Department of Transportation are all also meaningfully impacted. At this time, the duration of the shutdown is unknown.
It may not last long.
We think most market participants are not expecting a prolonged shutdown. Political parties should be sufficiently embarrassed, pride will be swallowed, and a deal will eventually be struck soon. This point of view, however, might underestimate the ability for Democrats and Republicans to act in the best interest of the nation. Though it could last as long as the shutdowns of 1995-96 that spanned a total of 28 days, when push comes to shove, a budget will be passed if it is needed to sustain what are deemed to be vital government functions.
The magnitude of the impact won’t be too large.
According to Macroeconomic Advisors, a two-week shutdown would have a negative impact of approximately 0.3 percentage points on US GDP during the fourth quarter, but the lost growth might simply be pushed into the US GDP during the first quarter of 2014 (any furloughed workers will likely get back pay when they return to work, as they did the last time the government shut down). While this figure implies that the nation’s businesses would feel the impact of a shutdown, it certainly doesn’t appear it will derail the economic recovery. Economic consulting firm IHS Global Insight also agrees.
US consumers expect government dysfunction.
Probably the most interesting revelation of the government shutdown is that the American people aren’t particularly upset or more importantly, surprised. The debt-ceiling issue from years-past highlighted the current amount of dysfunction between the two major political parties. At this point, the consensus is that Congress is gridlocked and can’t “get the job done,” so a government shutdown doesn’t change much.
We don’t believe the shutdown will have a material impact on consumer sentiment or spending, though it could become a concern if the dispute drags on for months. At the end of the day, people will continue to upgrade to the iPhone 5S (click ticker for report: ), improve their homes with supplies from Home Depot (click ticker for report: ), and buy Grand Theft Auto V (click ticker for report: ). Whether some government employees are working or not probably doesn’t factor into their purchase decision.
Valuentum’s Take
It isn’t a surprise that Congress wasn’t able to come together to resolve a simple issue, but the gridlock will only be slightly negative for US GDP growth (and perhaps only result in shifting growth into the future). We doubt anyone is happy with the shutdown, but as we already noted, the consensus expects incompetence from Congress at this point. In our view, government inaction was among the primary reasons why Federal Reserve Chairman Ben Bernanke decided not to taper bond purchases in September. All-in, the shutdown has no impact on our capital allocation decisions in our actively managed portfolios.
RJ Towner owns shares of the following companies: AAPL