Government Shutdown Enters Uncharted Territory

Government Shutdown Enters Uncharted Territory

January 17, 2019
The U.S. government is in Day 27 of a partial government shutdown, now the longest in history.

Past shutdowns have largely been a nonevent for the U.S. economy and stocks. Business and consumer confidence indicators usually decline and government spending drops during a shutdown, but any losses have typically been recouped quickly. As shown in the LPL Chart of the Day, U.S. stocks have also historically fared well after shutdowns, showing that any economic impact wasn’t enough to derail market rallies.

stocks strong gains after government shutdowns

It’s important to recognize, however, that the current shutdown has lasted for an unprecedented amount of time with no end in sight. The U.S. economy is also especially sensitive to a shift in confidence right now. Consumer and business confidence gauges have declined from cycle highs recently as negative headlines from the U.S.-China trade dispute and geopolitical squabbles have rattled financial markets and soured sentiment. Government employees missed their first payday of 2019 on January 11, increasing tensions and pressure for a deal before the U.S. economy takes a material hit.

“Trade tensions have softened corporate demand, and the shutdown could eventually weigh on consumer demand,” said LPL Research Chief Investment Strategist John Lynch. “A prolonged shutdown could have an outsized impact on consumer health as government workers pare back spending and other consumers feel the secondary impacts of lower demand and policy uncertainty.”

Right now, we believe this shutdown will have limited intermediate or long-term ramifications for economic growth, but it’s important to recognize that we’re in uncharted territory. Sentiment is fragile, and any economic impacts could snowball quickly. As mentioned in our Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets, we maintain our forecast for U.S. gross domestic product to grow at a 2.5%–-2.75% pace in 2019, with support from increased government spending. While we think there are reasonable prospects the government will reopen soon, we will continue to monitor economic data for any shutdown-related impacts.

For more of our thoughts on the shutdown, check out this week’s Weekly Economic Commentary: A Historic Government Shutdown.


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