Nov 01, 2013

The Government Shutdown: A Crisis for Federal Workers

The United States government underwent a shutdown of over 2 weeks in October of 2013. On October 16, 2013, the Senate passed and sent legislation to the House to avoid a threatened national default and end the shutdown. President Barack Obama signed the bill that ended the 16-day shutdown, allowing federal workers to return to work on October 17, 2013. This bill is a temporary measure that provides a few months of breathing room, extending the debt cushion to February 7th, 2014 with current spending levels authorized through January 15th. However, even with the shutdown over, the impact from the government shutdown has already had a major impact on the country and its workers.

“All employees who were on furlough due to the absence of appropriations may now return to work. You should reopen offices in a prompt and orderly manner.” ~Office of Management and Budget, Executive Office of the President

In addition to placing approximately 800,000 government workers on furlough, the impact of the shutdown is expected to ripple throughout the economy. According to HIS Inc., a partial shutdown of the federal government costs the United States at least $300 million per day in lost economic output. Bank of America projected that a two-weeklong shutdown would curb fourth-quarter growth by .5 percentage points.

“Government spending touches every aspect of the economy, and disruption of spending, more than the direct loss of income, threatens to damage investor and business confidence in ways that can seriously harm economic growth.” ~Guy LeBas, Chief Fixed Income Strategist at Janney Montgomery Scott LLC

Gallup’s Economic Confidence Index has dropped 12 points to -34 during the government shutdown. This is the largest decline since Lehman Brothers collapsed in 2008. The survey shows that 67 percent of Americans believe that the economy is getting worse. The weakening of American confidence will have an impact on investments and consumer spending; especially with the peak season of retail trade approaching.

In this article, we explore the impact the government shutdown so far and the effects we expect will linger even now that the government has reopened.

What Causes a Shutdown?

Under the U.S. Constitution, both the Senate and the House of Representatives have to pass a law renewing the government's authority to spend money every year. If the bill is not passed at the close of the fiscal year (which falls on September 30th) that authority elapses and many government services are suspended.

Percentage of Workers Furloughed, by Agency

Source: Washington Post

How have the Markets Responded?

The BBC reports that “worries over the US shutdown has hit Asian shares” with Japan's Nikkei 225 index closing 2% lower, the Hong Kong Hang Seng down 1.5%, Australia's ASX down 1.7% and South Korea's Kospi falling 0.7%. However, the Senate deal to keep the U.S. from defaulting on its debt and reopening the government had the stock market soaring the following morning.

Impact on the Job Market and Contract Workers

  • According to a survey by the National Association of Government Contractors, 29 percent of contractors say that a shutdown would cause them to delay planned hiring, and 58 percent said it would have a negative effect on their business.
  • Lockheed Martin, a giant U.S. defense contractor, put approximately 2,400 workers on unpaid leave at the beginning of the shutdown.
  • Sikorsky Aircraft Corp. in Connecticut notified 2,000 employees to expect temporary layoffs. These workers, however, were able to retain their jobs after the Pentagon announced that it would bring back 90 percent of its furloughed workers.
  • BAE Systems, a British defense contractor, placed more than 1,100 employees on furlough.
  • URS Corp, an engineering company, temporarily laid off about 3,000 employees due to the shutdown.

Ongoing Impact on the Economy and Businesses

  • The energy industry kept drilling but put approval of new plans on hold.
  • The industrial sector, vulnerable to shifts in economic temperament, is scaling back.
  • Automakers, such as General Motors, are concerned that the government shutdown will slow the industry’s growth, which has been strong this year. According to the CEO of Hyundai Motor Co.’s U.S. sales unit, John Krafcik, damage to consumer confidence from the shutdown could reduce October new-vehicle sales by up to 10 percent.
  • According to a survey by Goldman Sachs Group, Inc., two out of five Americans are curbing spending due to the government shutdown.
  • BNY Mellon, the world’s largest custody bank by assets, says that its balance sheet has increased by about $10 billion as clients hold onto cash in order to ride out the government shutdown.
  • Wal-Mart saw a slowdown at stores near government facilities at the beginning of the shutdown.
  • The District of Columbia, Maryland and Virginia all reported high levels of unemployment claims from federal employees. As of October 15th, unemployment claims from furloughed federal workers numbered 15,500. The Department of Employment Services in Washington D.C. generally receives 30,000 claims a year from all applicants. Maryland received 18,600 claims compared to 3,000 in a normal year.
  • The Federal Women, Infants and Children food assistance program, which provides for nearly 9 million low-income mothers and their children, has threatened to begin turning away recipients.
  • The Occupational Safety and Health Administration (OSHA) has stopped inspecting workplaces, while the Food and Drug Administration has stopped food inspection except for meat, poultry, and dairy. 
  • Businesses that require federal permits, such as distilleries, fisheries and hunters, are unable to bring new products to market or apply for permits. Alaskan crab farmers, for instance, have had to push back their opening date, which could have a severe impact on the $400 million business.  In 2011, the U.S. Fish and Wildlife Service estimated that the direct hunting-and-fishing-related sales resulted in $86 billion.
  • Mortgage applications by potential homebuyers fell by 5 percent.
  • The U.S. dollar fell to  an eight-month low versus the Euro and other major currencies.

Impact on the Various States

Using data from the Small Business Administration, the Department of Education, and other sources, a report from personal finance site WalletHub reported on  states which were most impacted during the government shutdown.

States Most Impacted by Government Shutdown

States with Most Federal Employees per Capita

States with Most Federal Contracting Dollars per Capita

How much has the Government Shutdown Cost the Economy?

According to an estimate from Standard & Poor’s, the government shutdown has cost the economy $24 billion. It has also reduced projected fourth-quarter GDP growth from 3 percent to 2.4 percent. The possibility of a debt default had spooked investors on Wall Street, hiking interest rates.

Hundreds of thousands of federal workers bore the burden of the shutdown. Small businesses also suffered from frozen government contracts and delayed business loans. Tourism took hits from closed national parks.

“The bottom line is - the government shutdown has hurt the U.S. economy. In September, we expected 3% annualized growth in the fourth quarter because we thought politicians would have learned from 2011 and taken steps to avoid things like a government shutdown and the possibility of a sovereign default. Since our forecast didn’t hold, we now have to lower our fourth-quarter growth estimate to closer to 2%.” ~Standard & Poor’s

Moody’s Analytics reported a similar number saying that the shutdown caused a $23 billion hit to the GDP of the United States, or $1.4375 billion per day.

The impact of the shutdown has been particularly hard on Washington, D.C. According to the Mayor Vince Gray’s office:

  • Regional impact has been $217 million per day in lost/deferred federal and contractor wages (that is 17.6 percent of the region’s economy)
  • $44 million a week decrease in economic activity
  • $6 million a week decline in tax revenue
  • A decrease of 7 percent in restaurant traffic compared to 2012
  • $2 million less revenue in hotel room bookings compared to 2012.

“Because it’s happening all at once, so quick, so fast, unplanned; it’s going to hurt. We can absorb it, but it still hurts.” ~Beth Ann Bovino, U.S. Chief Economist at S&P.

What the End of the Shutdown means to Federal Workers?

The ending of the government shutdown means that furloughed federal workers are returning to work. The deal in Congress includes provisions to provide back pay to workers. The shutdown divided employees into several categories in terms of pay

“Exempt” Employees: These are workers who are in functions that were not affected by the shutdown, such as U.S. Postal Service workers whose operations are self-funded or have multi-year budgets. These employees have been receiving regular pay and benefits.

“Excepted” Employees: These are workers who have continued to be employed during the shutdown due to the nature of their positions (related to national security, public health, or safety). They have been working unpaid since the shutdown started. These workers have been guaranteed that they will receive back pay once government funding is restored.

“Furloughed” Employees: These are workers who were not working and were unpaid during the shutdown. They had no guarantee that they would receive back pay during the period. The retroactive pay provision would apply to them.

It is uncertain when the back pay will be distributed though the bill calls for payment “as soon as practicable”. Since agencies use different payroll providers with different pay cycles and pay dates, sorting out the distribution is a cumbersome task for payroll administrators.

Many employees filed for unemployment compensation during the shutdown. According to the Labor Department, “If Congress passes legislation that retroactively provides for the payment of salary, states will generally require repayment of any unemployment benefits received. States will advise affected claimants if benefits are overpaid and if so, provide repayment options.”  Many of the workers who have applied have likely not yet received payments, as eligible individuals are required to wait a week and then payments are issued within 14 to 21 days after the claim is approved.

While federal employees will receive back pay under the deal, contractors will probably not recover their lost wages.

Standard & Poor’s warns that the temporary agreement will still have consequences for the economy, as consumers will worry about a repeat of the recent shutdown. This, along with the  stall in cash flow, is predicted to affect spending during the holiday shopping season.

“The short turnaround for politicians to negotiate some sort of lasting deal will likely weigh on consumer confidence, especially among government workers that were furloughed. If people are afraid that government policy brinkmanship will resurface again, and with it the risk of another shutdown or worse, they’ll remain afraid to open up their checkbooks.” ~Standard & Poor’s

“If it continues there’s no question that the negative consumer sentiment is most likely going to impact business of all nature – credit, investments, employment, just overall sentiment. No question about that.” ~Muhtar Kent, CEO of Coca-Cola Co.