Policy Path Clouded: Shutdown Delays Key Reports

The first government shutdown occurred in May of 1980. Including that instance, the government has shut down 10 other times in the last 45 years, with the current shutdown being number 11.

Examining history and data, the equity markets are largely unaffected by shutdowns and (in almost all cases) emerge unscathed, going on to post positive returns six months and one year following their respective shutdowns. (See the chart of the week for historical market performance during government shutdowns.)

While history shows government shutdowns have little impact on overall equity markets, there are a few things to consider for the current shutdown.

Expectations of further rate cuts are largely priced into the equity markets, with the highest probability of two more 25-basis-point rate cuts before the end of the year. As regularly mentioned by the Federal Reserve, the forward policy path is largely data dependent. With the current shutdown delaying key economic reports related to labor and other areas of the economy, the Fed’s ability to implement policy based on underlying economic conditions becomes very difficult. As a result, additional rate cuts may get pushed out further into the future until economic data resumes. Whether the market will look past this delay is an open question.

Related to economic data and policy, one of the catalysts of recent change in Fed commentary has been a softening in the labor market. While the non-farm payrolls and unemployment reports were delayed last week, the ADP report and the JOLTS survey confirmed a “no-hire/no-fire” trend that has been in place for some time. ADP employment came in at -32k, while job openings were higher than expected. Layoff announcements from Challenger Gray & Christmas came in lower as well.

A key difference in this shutdown versus previous ones is the talk of laying off government workers as opposed to furloughing. The government has been a key employer in the post-COVID recovery. Accelerated layoffs from the government at a time when the labor market is softening and hiring has been declining for several years may add additional pressure to the softening trend in labor, as those workers would need to be absorbed into the private sector.

The labor market has become a focal point for policymakers and the markets in the forward path of policy. These facets of the government shutdown need to be considered in terms of how they play out and how long the shutdown remains in effect.

What Happened

U.S. Job Openings  –  Job openings came in at 7227k vs. estimates of 7200k.

U.S. Payrolls  –  ADP Employment came in at -32k vs. estimates of 51k and previous readings of 54k.

U.S. Manufacturing  –  ISM Manufacturing PMI came in at 49.1 vs. estimates of 49.0, with New Orders coming in at 48.9.