Non-essential government employees are entering their fourth week of shutdown furlough, and D.C. is nearing a full month without a single official data release.
And while markets have remained resilient and bullish, it’s important to realize this shutdown is still taking a toll on the broader economy. One that could force the Federal Reserve’s hand at their next meeting — leading to a much-needed interest rate cut before Christmas.
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Video transcript:
This is Moneyball Economics.
I’m Andrew Zatlin, and if I had to make a prediction, it’s that we’re going to get that much requested rate cut, but not for the reasons anybody expected…
I think we’re going to get the rate cut primarily because this government shutdown is going to linger even longer than people wanted to. As a result, a massive hit to the economy, it’s going to force the Fed’s hands.
Let’s talk about what’s going on with the government and the shutdown and contextualize it. We have completed three weeks of shutdown. We have now entered the fourth week. When I look at my own proprietary data, well basically there isn’t any conventional data to look at because the government’s shut down and not releasing theirs.
When I look at my own data, what I see is that in the most recent week, well employers have cut back on their hiring and cut back a lot, cut back at basically the level you would expect to see during a holiday week.
So that means we’re seeing somewhere around 30,000 to 50,000 people out of work in one week, and it’s not going to stop. Like I said, we’re now in our fourth week, so we can expect, again, another big hit to whatever payrolls there are out there. This drop in labor demand is 100% linked to a drop in consumer foot traffic.
I mean, think about it. There are a substantial number of people in the United States who depend on their paychecks to survive. They don’t have a lot of money in the bank, and so they’re living paycheck to paycheck and guess what? Three weeks in, they’re not getting paid, and now we’re into a fourth week.
We’re talking about massive belt tightening going on at the lower income levels, and they spend a lot in the aggregate. That is a huge hit to the broader economy. Now, on top of that, we’ve got Trump coming in and saying, “I’m going to also pull back on federal government funding for various infrastructure projects that are keeping the lights on at the city, at the municipal, city and state levels.”
So you’re talking about a lot of money that’s not flowing through the private sector, and so businesses are responding.
If we don’t have as many people coming out to eat or drink because they quite simply didn’t get paid the last couple of weeks, well, that’s one less bartender, one less waiter, and so on and so forth, and that’s adding up across the broader economy. We’re talking billions of dollars that is not being spent and is not going to be spent. This is not spending that’s being delayed. This is just spending that’s not going to happen, and so the broader economy is going to take a hit.
Again, we are now in our fourth week, so that’s one month of belt tightening, and quite frankly, standing here, I don’t see any indication that the Republicans and Democrats are huddling up trying to come to some kind of reconciliation.
So this could go into five weeks, even six weeks. Right now we’re talking about a Halloween bloodbath because Halloween’s next week you got a lot of people who can’t afford to go out if it lingers past Halloween into November, black Friday’s now at risk. As a result, a lot of people are now looking at this situation.
Seriously, we are three weeks, almost four weeks into a shutdown, and both sides are choosing this hill to die on. So what’s going on? The implication for the broader economy and the political landscape is massive. This is not your ordinary budget fight.
Understand that the Democrats do not have a lot of votes on Capitol Hill, but they have enough to stymie major bills, major votes, and this one in particular is major because it’s the budget.
This is when they have maximum leverage, and what they’re doing is they’re basically saying, we’ve got to continue Obamacare. We’ve got to fund it another few trillion dollars. They need this because quite frankly, if they cannot bring home the bacon, if they cannot bring home money to their constituents, to the folks who need a lot of the social welfare support, then quite frankly, the Democrat party toast. There’s no reason to vote for them. They’re not bringing home the bacon.
Now for the Democrat Party, it’s also equally important that they include undocumented immigrants in the recipients of this money because quite frankly, they need it.
But also because the undocumented immigrants who’ve come in, in the past couple of years, I’ve heard numbers of 11 million, whatever the number is, they’re trying to get those immigrants to vote for the Democrats because quite frankly, they have been. Even though they’re not allowed to, even though they’re not supposed to, the Democrats are counting on this roughly 10, 11 million vote or base to get them over the midterm election next year.
And this is exactly why the Republicans are pushing back. If they can crush Obamacare, they have crushed the ability of the Democrats to be a viable alternative party, and the Republicans are going for the throat. So that’s why this battle is ongoing.
However, big party politics aside, the reality is people are suffering, people are hurting, and so we’re businesses. Like I said, if people are out there spending, businesses are struggling, and guess what?
They’re picking up their phone. They’re calling their Congressman Congresswoman and saying, make a deal, and so that’s why I think starting this weekend, you’re finally going to get these folks to sit down a room, roll up their sleeves, and try to figure out how both sides can win. Unfortunately, there really isn’t a win-win.
There’s a path forward that plays some games with voting this and that, but one of the premises is we can carve out the Obamacare for its own vote.
However, that removes the leverage that the Democrats have over the total budget, so they won’t go for it.
In essence, what we have is a major battle, not for the budget, not for Obamacare. This is the heart and soul, the Democrat party, their future next year at the midterm elections. In the meantime, let’s talk economics because this is such an important battle because neither side is feeling conciliatory.
The economy is getting decimated, so this will definitely have an impact on the fourth quarter, GDP. It will not affect overall business sentiment because businesses are going to look past this as a blip on the horizon.
However it is affecting their profits, it is affecting their ability to invest in their businesses to hire, and so on and so forth, and so this is a black eye for the fourth quarter. Bear that in mind as you’re investing because a lot of consumer oriented stocks are trying to look past this near term blip and focus on what is likely going to be a very strong holiday shopping season, or at least it was until the government shut down.
Let’s see what develops over the course of the week. We are in it to win it. Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics