So far, the shutdown has had minimal impact on unemployment claims, but the number of federal employees filing for benefits could jump significantly.
“Federal employees are supposed to get paid tomorrow for the pay period covering December 23-January 5. The 800k workers currently furloughed will obviously get nothing,” wrote Societe Generale economist Omair Sharif, in a note. “About 380k of those 800k are actually eligible to file a claim, so as it became clear during the week that there was no end to the shutdown, it wouldn’t be surprising if a number of them filed a claim this week.”
Sharif notes that unemployment data showed that a higher than normal 4,760 federal workers filed claims in the week of Dec. 29, but there didn’t appear to be an impact in the week ended Jan. 5, when claims fell by 17,000 to 216,000.
Sharif said he expects to see a “pop” in the unemployment filings, as there were 69,000 claims filed by federal workers in October 2013, during the first week of that shutdown.
There could be a further drag on the economy if there’s a drop in business or consumer sentiment, or if the shutdown starts to worry the stock market, the BofA economists noted.
So far, the stock market has not focused on the shutdown as an issue, but there’s been no precedent for a much longer shutdown and the market is already highly volatile.
“If it goes past the end of January, that could really impair confidence,” said Tony Roth, CIO at Wilmington Trust. He said consumers could be impacted if they are unable to get tax refunds, and businesses may be more reluctant to make capital expenditures.
Roth said in an interview that the shutdown, along with trade, is one of the major headwinds for the stock market.
The shutdown is beginning to filter into the stock market’s psyche. Stocks took a leg lower Thursday after Trump tweeted he would not go to the World Economic Forum in Davos, Switzerland, later in the month because of the shutdown.
Market pros took that as a sign that the shutdown could be extended. There had also been optimism that Trump could meet Chinese officials there and make progress on trade issues.
“I think it’s the fact that President Trump announced he’s not going to Davos. It’s just a reminder of how utterly dysfunctional the federal government is,” said Ward McCarthy, chief financial economist at Jefferies. “It just means it put potential progress on trade negotiations on the shelf, and the market didn’t like that.”
UBS says history shows there hasn’t been much impact on stocks from past shutdowns. “Markets have actually historically performed positively when the government has been shut down. The US government has shut down 14 times since 1980, yet the S&P 500 delivered positive returns two-thirds of those times, with an average return of 0.4%,” according to a UBS note.