Shutdown Muddles the Jobs Picture for Economists, Fed

Negotiations among congressional leaders to approve a short-term funding bill have reached a standstill. (Anna Moneymaker/Getty Images)

The U.S. government shutdown probably won’t jeopardize long-term economic growth. But it could complicate the collection of economic data, particularly labor-market data that the Federal Reserve relies on to set monetary policy.

Negotiations among congressional leaders to approve a short-term funding bill have reached a standstill, threatening to prolong the latest shutdown, which began on Oct. 1. Economists estimate that a shutdown would reduce growth in inflation-adjusted real gross domestic product by 0.1 to 0.2 percentage points for each week that it persists.

The Congressional Budget Office calculated in 2019 that the record-breaking 35-day shutdown that ended in January of that year cost the economy $3 billion for the fourth quarter of 2018 and the first quarter of 2019. That amounted to a drag of just 0.02% on annual GDP in 2019, the CBO said.

Even if the current shutdown doesn’t derail the economy, it is robbing policymakers and the public of critical economic guidance from three federal statistics agencies—the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Census Bureau—whose work has been paused. Contingency plans released by the Commerce and Labor departments confirmed that economic releases will be postponed for the duration of a shutdown.

Delays in the dissemination of economic data could create challenges for the Fed as it weighs the risks of higher inflation and a weakening job market ahead of the next Federal Open Market Committee meeting, scheduled for Oct. 28-29. Those risks are fairly balanced at the moment, in the view of most Fed officials.

The futures market, meanwhile, has put 98% odds on the Fed cutting interest rates by a quarter of a percentage point at its October meeting. That would follow a quarter-point cut in September, the first rate reduction this year, made as most Fed officials judged cooling labor market conditions to be of greater concern than above-target inflation.

The FOMC is in “an OK spot to handle the data blackout,” says Michael Feroli, chief economist at J.P. Morgan.

Heading into the past week, Fed officials signaled in a variety of speeches that a rate cut in October was likely as a hedge against worsening labor conditions. “The last data we received before the shutdown appeared to confirm that labor markets were softening, and so it seems pretty straightforward that they will cut later this month,” Feroli says.

Still, investors should listen for any changes, even subtle ones, in the tone and messaging of Fed officials in the next two weeks. Some economists believe that the dearth of data could lead the Fed to pause rate cuts this month. Fed Chair Jerome Powell may offer clues to the Fed’s direction in his scheduled speech on Oct. 14 at the National Association for Business Economics convention.

Any shutdown that extends beyond October could add new wrinkles for the Fed, Feroli says. If official data are lacking ahead of the FOMC’s Dec. 9-10 scheduled meeting, it will be difficult to predict how policymakers will respond. “Obviously, they would make use of alternative data, but that can only take you so far,” Feroli says.

The shutdown delayed the release of the Department of Labor’s weekly unemployment claims data, slated for Oct. 2, and the Bureau of Labor Statistics’ September jobs report, which normally would have been released on Friday morning. A government shutdown last halted release of the monthly jobs report in October 2013.

In the absence of government data, investors and Fed officials have been left to parse privately calculated measures of labor conditions, which offer a conflicting picture.

The most widely watched private payroll metric is ADP’s National Employment report. Released on Wednesday, the latest data revealed that employers shed 32,000 jobs from private payrolls in September—a surprising contraction in monthly employment, as economists had expected to see evidence of more growth. The disconnect was due, in part, to the fact that ADP had conducted annual revisions to its August and September payroll data.

The downturn in job growth as measured by ADP wasn’t apparent in other data. A newer measure of total U.S. employment, the Revelio Public Labor Statistics, released on Thursday, showed that the economy added approximately 60,200 jobs last month. Data from Revelio, a provider of workforce analytics, also showed that the number of employees notified of layoffs declined in September, a finding that data from Challenger, Gray & Christmas confirmed.

The Federal Reserve Bank of Chicago’s latest forecast of the real-time unemployment rate also showed little change. Its measure of the September unemployment rate was 4.34%, largely in line with the reading of 4.32% for August.

A prolonged shutdown would jeopardize the release of other economic statistics, as well. It potentially could delay the release of the latest consumer price index reading, scheduled for Oct. 15, and the September retail sales report prepared by the U.S. Census Bureau, slated for Oct. 16.

Personnel at the federal statistical agencies aren’t collecting or processing data during the shutdown, and will need to resume operations when the government reopens. That means the delay of economic releases would probably last slightly longer than the shutdown. When the government shut down for 16 days starting on Oct. 1, 2013, a Thursday, the BLS didn’t release the September employment report until Oct. 22, notes BNP Paribas Securities Senior Economist Andrew Husby.

The CBO reported that about 750,000 federal employees, or roughly a third of the federal workforce, will be furloughed during the shutdown. That’s less than 40% of employees who were furloughed during the shutdown that ended in January 2019. All furloughed government employees will receive back pay.

If the Trump administration follows through with threats to lay off large numbers of federal workers, this could sink the prospects for any public-sector payroll growth in October. Plus, economists are expecting a large number of deferred resignations to take place this month.

But the public probably won’t know the full impact on the labor market until the government reopens and the BLS gathers data again.

Write to Megan Leonhardt at megan.leonhardt@barrons.com