How Will the Government Shutdown Impact the Economy?
The House and the Senate were not able to agree on a bill to fund the government and the shutdown has officially started this Tuesday.
The republican opposition for the Affordable Care Act remained the major source of conflict within the Congress.
Stocks fell Monday as investors anticipated the shutdown. Dow Jones Industrial Average Index fell 0.84 percent, S&P 500 fell 0.60 percent, and the NASDAQ fell 0.27 percent.
While the government as a whole will still be active, many branches of the government will be closed or slowed. Initially, “non-essential services” provided by the government, such as national parks and interstate stops, will be suspended.
Most civilian federal workers will be staying home without pay and may or may not be paid retroactively when a funding bill passes. Other federal workers will continue to work, but will not receive pay until the shutdown ends.
Over 800,000 workers, or about one-third of the federal workforce, are expected to be put on an unpaid leave by this shutdown. Washington, D.C. is especially expected to take a big hit due to its high concentration of federal workers.
On a national scale, tourism, federal contractors and other industries will suffer due to government’s inability to provide permits, visas, and other essential services and documents.
While very short shutdown is not expected to create a significant economic damage, Macroeconomic Advisers report that a two week shutdown may shave off 0.3 to 0.4 percent off of the U.S. GDP.
Historically, most shutdowns end within a week. However, considering that the previous shutdown lasted 28 days, a shutdown lasting two weeks or more is seen as a possibility among investors.
Despite the looming threats and the initial pullback in the market, many investors see the government shutdown as a buying opportunity. The last shutdown at December 1995, according to S&P Capital IQ, caused 3.7 percent fall in S&P 500, only to spike up 10.5 percent the following month.
"If you see a five or 10 percent pullback, if you look at valuations, investor sentiment and the fundamental outlook, you want to be on the side of taking advantage of those sell offs in the market," Dan Suzuki, equity strategist from Bank of America Merrill Lynch stated to CNBC. "I think it will be a buying opportunity. Part of that is conditioned on what is a low probability event that we trigger the debt ceiling. I think there's just too much pain for that to be a likely outcome."
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