The Partial Government Shutdown, Wall Street and Implications

While a partial shutdown of government is not unprecedented, the frequency of occurrence is relatively rare.

In the United States’ more than 200-year history, the first U.S. shutdown came under President Gerald Ford. Then Jimmy Carter’s presidency essentially changed the rules for shutdowns. His Attorney General, Benjamin Civiletti, issued a legal opinion essentially saying that government work cannot go on until Congress agrees to pay for it. His initial opinion was that no government employee could work at all without government’s immediate ability to compensate them. He later backed off of that stance saying some essential personnel could work, while non-essential people could not. The President is the individual that defines which employees are essential and those who are non-essential. Carter had five shutdowns during his presidency.

Perhaps the shutdowns most remembered occurred in November 1995, and again into January 1996, when Bill Clinton was President and Newt Giegerich had succeeded in his Contract With America. There was give and take at that time across the aisle – something we have not seen today. Reagan had eight shutdowns, and Bush (41) had one.

While you may not have expected the results, during the days of Clinton’s two shutdowns, on average, the S&P 500 traded up—gaining 4.4 percent from start to finish in two months. Annualizing that return would yield a gain of more than 26 percent. The following graph shows the days of partial government shut downs in comparison to the S&P500 index performance, and a few days on each side. So obviously, Wall Street was relatively content with a shutdown in those days.

10-7-13 graph1

What about today’s government shutdown? Since 2009, U.S. government debt has increased from $10.2 trillion to $17 trillion. Yes, you read that correctly. In less than five years the total debt of the U.S. government has increased almost 70 percent. The big showdown today is between the U.S. House of Representatives, who want to defund or temporarily not fund the Affordable Care Act, a.k.a. Obamacare, and the President. The catalyst today in those talks is that a past Congress and the then President had agreed to a legislatively-enforced debt ceiling that limited the total amount that the U.S. could borrow.

In 2008, then Senator Obama opposed then President Bush’s request to increase the debt ceiling. And that was when the total U.S. debt was in the $9 trillion range – almost one-half what it is today.

Kind of ironic don’t you think?

So let’s talk about today’s government shutdown. Here’s the current, short-term shakeout:

  • Out of the approximate 2.8 million total Federal employees, 800,000 are no longer on the job and are considered as non-essential. On average, one out of every six people in the U.S. works for either the federal, state or local government. That means that each five non-government employees, pay for the sixth through their taxes. These are just nonfarm jobs and thus do not include the military. 
  • Roughly 1.3 million employees have been tapped to keep on working during the shutdown and will be paid at a later date (the last shutdown saw even non-essential government employees fully compensated for the time the government was shutdown).

So what are the immediate impacts? First and foremost – and this is the economist speaking here – no longer available are any economic and demographic websites from the U.S. Government. I can no longer look up employment information of any type on the U.S. Department of labor’s site, nor building permits or population numbers on the Census site. Not even historical data—forget the non-reporting of September’s employment numbers. Thank heavens my assistant systematically downloads those data so I have some historical data to work with during this blackout period.

I want to make a personal statement here. While I do understand the U.S. Department of Labor did not issue September employment and related data last Friday, why did they shutdown the entire website on historical data? Ditto the U.S. Census Bureau. I think the answer is to make a political and not an economic statement. Not the department of Labor per se, but rather the politicians. And we are talking both sides of the aisle.

How much is too much debt? I guess the answer depends on which country you are in and related population demographics. Very fortunately, the U.S. is a country that is growing, and is projected to increase in total population from 2010 to 2050 by 37 percent. That means the country can take on more debt since debt per capita will decline. Compare that to Japan, which in the same period is projected to shrink in population by 16 percent, or Greece, shrinking by 6.6 percent.

So where do we stand or our current debt? The following graph shows total U.S. debt as a percentage of Gross Domestic Product (GDP). U.S. sovereign debt today stands at 101.6 percent of GDP—which is the total value of all goods and services. In comparison, the international banking community put Spain on notice when their debt to GDP ratio approached 75 percent. Canada’s debt-to-GDP runs in the mid-35 percent range – just one third of U.S.

10-7-13 graph2

Unless you are one of the furloughed employees or have not been able to enter a national park, museum, or government website, up to now, the government shutdown has been mostly cosmetic. That would all change, however, if the U.S. defaulted on their debt obligations and missed payments on Treasury bills, bonds and notes. Such an act would likely see interest rates spike, a global liquidity freeze and all-but guaranteed cut by ratings agencies. Just imagine revisiting 2008 again, from an economic perspective.

Are we going to default on our debt obligations? I doubt it, because the ramifications could be so significant. I certainly hope we do not go over that cliff.

That said, the government cannot continue spending at the current level given revenues and future commitments.

Several years ago in the newspaper, the headline was essentially “U.S. Spending Like a Drunken Sailor.” That motivated a letter to the editor from a retired Navy Rear Admiral that said, “Your headline offended me, as once I was a drunken sailor.” He went on to add, “But at least when we ran out of money, we quit drinking.”

A to-the-point response.



  1. H

    Thanks, very well done but we are starting to feel the impact already – may not be just cosmetic.

    Maybe antidotal, but I know we had two closings cancelled because we could not get IRS payoffs, the IRS is not verifying tax returns that some lenders require to give loan commitments, probably other things I have not heard of yet. What a mess…………….

  2. Scott Rinde

    Hi Ted,

    I’m currently reading David Stockmans recent book “The Great Deformation”, and he prompted me to question my unthinking thinking about deficit & debt to GDP ratios. It would appear that historically, as consumption grew from around 60% of GDP to 70%, and debt financed at that, and whatwith ever more of federal disbursements financed by government debt going to consumption (and I would count some significant and growing “investment” in things like education that doesn’t yield increased productivity as consumption), these ratios do not tell us what we think they’re telling us. The GDP bumps within the year of it’s expenditure, but the debt rolls over into the next year and the next and the next… It seems like it’s worse than we think, but I grow fatigued by the long wait for armageddon. Is Stockman scaring me inordinately? I know some accuse him of being a dummy and a failure, but so often it’s Them that learn the most.

    Best Regards,


  3. Amanda Farley

    To H, Lenders need to share risk. They need to keep moving out the secondary pipeline on good faith and the analysis of risk in their own warehouse. We all must start taking smaller spreads as well as require less reserve!! We need to down size government.

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