The United States government is on the brink of a shutdown unless Congress passes an appropriations bill to fund its operations. The deadline looms large, with federal agencies set to suspend nonessential activities starting Wednesday at 12:01 AM in Washington, DC (04:01 GMT). The recently revealed Republican-controlled House of Representatives alternative short-term spending plan. At the same time, Democrats are capitalizing upon the upcoming shutdown to a considerable extent, making negotiations more difficult.
Even with a body count that gives Republicans total power in the House and Senate, Republicans can’t pass the legislation on their own. The stalemate leaves our dedicated federal workers and our whole economy in a precarious state. This year, more than 150,000 federal employees are expected to depart the workforce due to buyouts.
Impact on Federal Workforce
In a memo issued last week, federal agencies received directives to prepare layoff notices for programs that would run out of funds by the looming deadline. These cuts are from a deferred exit program. As a consequence we are currently experiencing the largest federal job cuts since the end of WWII. ETSC legal expert Daniel Hornung focused in on the legal issues related to these layoffs and their targets.
“There’s no legal authority that you [the White House] get from shutting down to do RIFs.” – Daniel Hornung
The potential layoffs come with significant implications. If an agency needs to use cuts, they first need to commit to reduction in force (RIF) procedures. These procedures have a notice period of 30 to 60 days. Hornung cautions that whatever is done today would still be challenged in court. This puts the workforce and the economy as a whole in a state of limbo.
Historically, government shutdowns have had no permanent effects on financial markets, with investors usually seeing them as temporary bumps in the road. Hornung said that based upon experience on previous shutdowns, they have not had a major impact on equity or bond markets.
“Typically in shutdown scenarios, there’s not much impact on either equity markets or in bond markets, mostly because investors tend to look through shutdowns and assess that any temporary slowdown associated with the shutdown will be reversed when the government opens back up.” – Daniel Hornung
Economic Ripple Effects
The potential effects of this shutdown will be felt beyond the gates of our national parks, impacting the broader US economy. After a summer of strong hiring, the nation added just 22,000 jobs in August – a serious slowing of the year’s pace of hiring. According to the Department of Labor’s (DOL) Jobs Openings and Labor Turnover Survey (JOLTS), hiring fell by 114,000 net jobs for that same month. Job openings did get a small bump, increasing by 19,000 to 7.2 million.
Michael Klein, a professor of international economic affairs at Tufts University in Massachusetts, expressed concerns over consumer spending. We appreciated that he raised these issues against the backdrop of today’s very uncertain economic times.
“Consumers will start spending less because they’re concerned about what the future looks like.” – Michael Klein
With unemployment spiking from layoffs and a workforce that is overall contracting, consumer spending—which carries the economy—could be in for a nose dive. As Klein explained, people who unexpectedly lose their job will delay major purchases, most notably for such expensive items.
“It might be decided [by the court] that it’s not lawful, but that could be a long time. Even if it all gets resolved, those out of a job probably aren’t going to be spending like they otherwise would.” – Michael Klein
A Unique Economic Situation
Experts are warning that the economic situation today is especially dangerous. Unlike previous shutdowns—even the lengthy one in 2018 when the economy was clearly humming along—today’s are different. The labor market is finally beginning to signal weakness, and the inflation risks are still there thanks to tariffs placed into effect earlier this year.
He cautioned that this moment is unlike any other shutdowns. This risk is exacerbated by an economic landscape that is already fragile.
“Now the labor market has really weakened. It appears in recent months the risk of inflation remains because of the tariffs. And so, it’s kind of this question of how much can the economy withstand.” – Daniel Hornung
He warned that the current moment is different from past shutdowns. The risk is higher due to an already fragile economic landscape.
