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The Government Shutdown: There’s more at stake than just a wall

When the President of the United States opted not to sign into law a bipartisan bill to fund several government agencies (a bill which was overwhelmingly supported in both the House of Representatives and the Senate), the US Government entered a partial shutdown at midnight on the 22nd of December. A government shutdown isn’t a unique event anymore.  Shutdowns go all the way back to President Carter, and the only period in which there wasn’t a shutdown was during the George W Bush Administration.  The current shutdown is the longest in US history.

What is the real impact of a shutdown from an economic perspective?

Let’s start with the actual employees that are impacted by the shutdown.  The current shutdown impacts roughly 800,000 federal employees across nine federal departments:

  1. Department of Treasury
  2. Department of Agriculture
  3. Homeland Security Department
  4. Department of the Interior
  5. Department of State
  6. Department of Housing and Urban Development
  7. Department of Transportation
  8. Department of Commerce
  9. Department of Justice

Many of these employees, such as the Transportation Security Administration, will have to work without pay.   These are the individuals that help protect the US and travellers to the US at airports around the country.  So how does this impact them?  According to Northwestern Mutual’s 2017 Planning and Progress Study[1], roughly 70% of US workers live pay check-to-pay check.  This statistic inevitably includes some of the TSA workers.  Credit card bills, mortgages, utilities, rents, etc. are likely to become delinquent due to the cash flow constraints of these workers.  These are just some of the knock-on effects.  In some states, the federal government is the major employer.  In such cases, there is a further erosion of the supporting community, such as restaurants, shops and banks, as patronage will be lower due to the federal workers having limited resources to put back into local commerce.

There are also more macro-related issues surrounding shutdowns.  In the US, for instance, interest rates have been rising due primarily to the strong economy and the increasing level of inflation.  This has already made borrowing money more expensive with regard to mortgage repayments (those that have a variability aspect to them), consumer debt, auto leasing, etc.  The shutdown exacerbates the situation by making the economy more unstable.  The US hasn’t been in a recession since June 2009, which marked the end of the Great Recession or better known as the Global Financial Crisis.  Shocks to the economic system such as a government shutdown could be a catalyst for propelling the US into a correction or recession.   We saw some of these fears play out in the US stock market in late December/early January.

Credit concerns are another aspect to the government shutdown.  According to Standard & Poor’s, the US credit rating stands at AA+.  Both Moody’s and Fitch have the US at Aaa and AAA respectively.  A protracted shutdown could lead to a downgrade of that rating.  If that happens, interest rates will rise, bond debt will worsen, and the dollar could potentially see a real weakening against the global market basket of currencies.  This would result in a higher cost for imports.

Investing globally will help soften the blow of any negative impacts from the government shutdown.  But, as the old adage goes “When General Motors sneezes, the stock market catches a cold.”  Now simply replace General Motors with the United States and the stock market with the global economy, and you have a recipe that isn’t very appealing.

[1] https://news.northwesternmutual.com/planning-and-progress-2017

Risk Warnings and Important Information

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The above article does not take into account the specific goals or requirements of individual users. You should carefully consider the suitability of any strategies along with your financial situation prior to making any decisions on an appropriate strategy.

MASECO LLP is authorised and regulated by the Financial Conduct Authority for the conduct of investment business in the UK and is an SEC Registered Investment Adviser in the USA. MASECO LLP trades as MASECO Private Wealth. It is a limited liability partnership registered in England and Wales and has its registered office at Burleigh House, 357 Strand, London, WC2R 0HS. The information is based on our understanding of current tax law and practice. However, MASECO Private Wealth is not a tax specialist. We strongly recommend that every client seeks their own tax advice. The tax treatment of any investment or particular strategy will depend on the individual circumstances of each person and may be subject to change in the future. This document does not constitute and should not be construed as investment or any other advice. The information contained herein is subject to copyright with all rights reserved.


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