The latest U.S. government shutdown, which has lasted all month, risks turning from a temporary disruption to a more meaningful economic drag, says BMO Capital Markets.
In a new report, the bank’s economists said that the fallout from the government shutdown, which has hampered certain public services and prevented the release of economic data, is starting to affect the wider economy.
“As the standoff drags on, what should be a temporary disruption could turn into a lasting drag on economic growth and labour market stability at a time when other headwinds persist,” the report said.
Amid an already-weak labour market, the shutdown south of the border has resulted in 670,000 federal workers that have been furloughed — and another 700,000 workers that are on the job without pay, the report noted.
This typically represents a blip in employment data but, as the shutdown drags on, “the longer-term hit could become more serious,” the report said. “Small businesses that depend on government contracts or spending by federal employees may also reduce staff. Over time, this can lead to a higher jobless rate, weaker labour force participation, and slower wage growth.”
The shutdown could also have far-reaching social implications, the report warned.
Beyond the direct effects on households that depend on furloughed workers, the shutdown also weighs on essential workers such as air traffic controllers, who are working without pay, “leading to fatigue, low morale, and even absenteeism, which in turn impacts airport wait times and flight safety operations.”
Additionally, so-called SNAP benefits, which provide food assistance to low-income households, are set to cease as of Nov. 1. And, the report noted, “an average of 42 million Americans per month rely on SNAP, suggesting food insecurity has risen for roughly 12% of the population.”
So, “What might seem like an impasse in Washington translates into real financial and emotional hardship for many. This is perhaps the biggest cost stemming from the shutdown,” it said. “And, the longer this goes on, the greater the cumulative damage to the nation’s social fabric.”
There’s also an impact on monetary policy, which is now operating without the benefit of any official government data. That adds another layer of uncertainty at a time when the Fed is starting to cut rates again, the report said.
There are effects on Canada, too, which relies on U.S. data to calculate certain statistics, such as monthly trade data.
“Not only does [the lack of data] reduce visibility on the effects of tariffs, but since the trade data are used to calculate real GDP by expenditure, the Q3 GDP estimates (released in late November) are subject to larger-than-normal revisions,” the report said.
As this shutdown drags on, “the economic and human toll continues to grow each day,” the report concluded. “And, at a time when major headwinds are already working to slow the U.S. economy, the shutdown is an added strain.”