Jason Stipp: I’m Jason Stipp for Morningstar. As we head into day two of a government shutdown, what might the potential impact be of the government closure on economy? Here to offer his insights is Morningstar's Bob Johnson, our director of economic analysis. Thanks for joining me, Bob.
Bob Johnson: Thanks for having me.
Stipp: Before we talk about the potential impact of the shutdown on the economy, let's just define exactly what we mean by shutdown. What's closed, why is it closed, and why are some things still open?
Johnson: There are several things going on here. First of all, we've got the budget authorization, and there are many items that need funding every year that don't have an ongoing program and that have to be budgeted and approved. We've got no resolution to continue that spending or no new budget for that matter for the year that started Oct. 1, so that's why Oct. 1 was so critical. That's the government's fiscal year.
Now, there are certain things that have kept that from being a disastrous impact because you are allowed to keep essential employees and there are certain things that are pretty well-defined about what you can keep and what you can't. There are things like Social Security that are funded over a long-term program and aren't subject to any of the budget cutbacks, so those things, those normal payments go out. But, on the other hand, there are 800,000 to 900,000 nonessential government employees that are not working as of Oct. 1 and theoretically have no paycheck.
Stipp: That's 800,000 workers out of a total of 2.9 million workers in the government; 800,000 are not going to work right now as nonessential. So let's put that number into some context. We looked at the ADP report and that showed 166,000 jobs added, and that's quite a bit less than this 800,000 that aren't going to work right now.
Johnson: It's a really big deal, because it's 800,000 people without a paycheck. Now, obviously, they are not going to notice that right away, but just in the context of things, 200,000 jobs a month would be a lot. And to lose 800,000 all in fell swoop, that's a big deal. I don't think people have fully considered it.
Stipp: One thing we don't necessarily know is whether if the government opens up, [these workers] would get back pay.
Stipp: We don’t know for sure that that’s going to happen, right?
Johnson: I think most managers of the government are telling people they have to be cautious about it. You can't assume you are going to get back pay. They happened to [get back pay] in the 1995-96 shutdown. But who knows what could happen, and people are going to have to be careful with their spending. That means poor retail sales and less manufacturing and all that goes with that. It's not good news.
Stipp: You mentioned the shutdown that happened in the '90s. We can use that as a precedent to kind of gauge what the effect of this shutdown could be on the economy if it ends up being prolonged. What did we see as the estimated effect on the economy when the government shut down in the 1990s?
Johnson: Again, I can't vouch for necessarily the quality of the number, but the general estimates are it took 0.4% off the economy for GDP growth in that one quarter. That was a three-week shutdown, so if we went for a full month, it would be more than that.
Stipp: Are there reasons to believe, if we go the same length of time that it would be a bigger effect or a smaller effect this time around?
Johnson: I personally think it would be bigger because I think they’ve got more people in the nonessential bucket this time around, and there is less clarity about what the back-pay situation will be, which will be a big deal. Ultimately, I really hope those people end up getting paid if they are out through no fault of their own. But as this goes into multiple weeks, that becomes a bigger number and a bigger issue.
Stipp: If this goes on for three to four weeks, about the same size as we saw in the '90s given the amount of people out of work now, what are you estimating that we might see as a subtraction in GDP?
Johnson: GDP is only growing 2% right now, and I think it would take off at least a half. So, it's a big deal.
Stipp: [It would take off] 0.5%?
Johnson: Yes, 0.5%. I mentioned that direct wages were probably something in the order of taking off 0.3% from GDP growth, but then you've got the ancillary effects a little bit. You've got the restaurants that are next to the Capitol building. You've got the hotels and airlines from the government travel that would have otherwise happened. Remember, it's the last person in the door that makes those marginal costs happen the way they do, and that means that’s often the person that’s the profit. So, if we have one or two people not show up at a hotel or an airline flight, that’s a big deal to profits, and I don’t think people realize that.
Stipp: It seems like you are implying, especially when we look at some of the ancillary services that these workers would consume, but maybe won't consume, that damage is already being done, even if we could get the shutdown resolved in the next few days.
Johnson: People buying a car, that can be remade up once they eventually get the income again, if they get the income again, which I think they probably will, or the government can buy its tank one day instead of another. But you can't make up a restaurant meal, an airline flight, or a hotel room; that’s stuff that’s gone and that started going as of Oct. 1.
Stipp: The other thing, of course, that's on the radar is not just the shutdown and how long the shutdown goes--and it seems like if it goes on there will be a very definite impact on the economy--but the debt-ceiling debate that we're also keeping our eye on and it's really scaring some people a lot more than the shutdown. What's your take? How are you weighing these two big problems that we have in the government right now?
Johnson: I think the shutdown process, believe it or not and it might not seem that way, is half-way organized, and they've got essential, nonessential employees and know how it works. But if we hit up against the debt ceiling--which nobody knows exactly what day we're going to hit it but it's somewhere mid-October to Nov. 1 that we’ll probably hit that number--then we don’t have enough money to literally pay our bills. The law may say we have to pay these, but somebody is going to have to sit in the back room and say pay this one, defer that one. I mean, they eventually will get paid; we'll make good on it. The issue is that we will have to pick and choose and only two thirds of our bills will get paid starting somewhere in mid- to late October. And that’s certainly not good news, and that’s not an organized process. And somebody is going to have to handpick who gets paid and who doesn’t. Hopefully, we don’t find out how that process works. Really I'm hoping we don’t.
Stipp: But aside from how the process would actually work, the markets could react in a way that we just have no idea. Obviously, it would be a negative way. But the magnitude, do we have any sense of what might happen there?
Johnson: Just a little bit. I mean, again, in the 1995-96 time frame there was kind of a 3%-5% impact on markets. We're certainly not there yet his time around, and I think this situation is probably a little bit more dire than it was the last time around.
Stipp: That’s for the shutdown, the shutdown alone.
Johnson: Right. The debt-ceiling situation that we had in 2011, that was probably more like, round numbers, about a 10% impact. [The debt ceiling] is clearly a bigger deal. It was in 2011, and it will be probably this time. Again, you could look at a relatively negative impact. I do point out, the silver lining is once you have an agreement and we have something to look forward to, generally the markets have done exceptionally well, and it's provided somewhat of a buying opportunity. But getting from where we are today to that kind of 5%-10% potential decline is a little scary.
Stipp: All right, Bob. We'll definitely be fastening our seatbelts and checking in with you as news becomes available on both the government shutdown and the potential for hitting that debt ceiling. Thanks for joining me today.
Johnson: Thank you.
Stipp: For Morningstar, I’m Jason Stipp. Thanks for watching.