With 800,000 federal workers not receiving pay equating to more than $2 billion last Friday amid the ferocious standoff between President Trump and Congress over funding for a wall at the southern border, the government shutdown is starting to take a direct toll on consumer spending.
The partial U.S. government shutdown officially became the longest in history this weekend and as it shows no signs of ending, retailers are getting caught in the crosshairs.
This is particularly prevalent in areas that rely on the government for employment. In Washington, D.C., which alongside its surrounding areas is home to the most federal workers in the U.S., there are reports it’s like a ghost town as families struggle to make rent and mortgage payments, leaving them little choice but to cut back on discretionary items.
“That’s a lot of spending that goes away and a lot of spending that isn’t going to get replenished,” said Steven Blitz, chief U.S. economist at TS Lombard, at the National Retail Federation’s Big Show in New York on Monday. “Those lost sales are lost.”
While former chairman of the Federal Reserve Janet Yellen, who was also speaking at the conference, believes that the impact so far has not been significant, she cautioned that if the shutdown continues, “it could impact consumer psychology and consumer sentiment.”
“We’ve seen that in the past when consumers have the sense that there really is disruption in the environment. I don’t think we’ll see any major disruption if it ends quickly,” she added.
And it’s not just a lack of pay that could prevent shoppers from opening their wallets as the shutdown could result in delayed tax rebates for millions of Americans.
Even before the shutdown, the IRS was cautioning potential delays in tax rebates because of the challenges in navigating the new tax law passed in December 2017, according to Chris Krueger, an analyst at Cowen Washington Research Group.
“About seven in eight IRS employees are currently furloughed. The OMB announced the IRS would recall thousands of furloughed employees to be sure tax refunds went out per schedule, despite numerous administration officials questioning if this is legal,” he said.
The shutdown also means that government bodies will struggle to accurately capture how the economy is faring, meaning that policymakers won’t have the whole consumer spending picture in front of them when they’re making decisions on important issues like interest rates.
In addition to a raft of other data including trade and construction, Wednesday’s scheduled December retail sales report will likely be delayed as the Commerce Department remains without funding.
The shutdown could also impact retailers planning an IPO this year as the Securities and Exchange Commission, through which companies have to file, is shut and when it opens, there will likely be a hefty backlog to work through.
“Everyone is pretty much on hold during the shutdown,” Timothy Kviz, national assurance managing partner for SEC services at BDO, said. “The backlog will depend on how long the shutdown is. Certainly the longer the shutdown is, the greater the impact.”
He added that the uncertainty could even lead to deals falling apart as it’s not uncommon for a company to undertake an initial public offering as part of an acquisition and if there is no capital, the company has to find another source of funding or “walk away from the deal.”
Levi Strauss & Co. and Revolve are among those retailers said to be planning IPOs this year, with the former thought to be considering making a move in the first half of the year.
For now, most economists agreed that the shutdown shouldn’t be enough to significantly impact the economy, knocking just 0.1 to 0.2 percentage points off growth per week, but warned that this could change if it drags on.
The prospect of an extended shutdown appeared more likely Monday after Trump turned down a proposal by Sen. Lindsey Graham (R., S.C.) to temporarily reopen government while both sides continue to hash out a deal.
“We judge these costs to be negligible so far,” Joel Prakken, chief U.S. economist at Macroeconomic Advisers, said. “For a brief shutdown, such costs would arise very early in the first quarter and so likely would be made up within the quarter without much impact on first-quarter [gross domestic product] growth. Of course, if the shutdown drags on, such disruptions and their costs will mount.”
Laura Porter, a managing director at Fitch Ratings, shared these sentiments: “A prolonged shutdown without a clear path or time line to resolution could trigger significant concern among unpaid federal employees leading to at least temporary economic effects in localities with high federal employment concentration.”