As investors are heading home for the holidays, some federal government employees have to some involuntary leave.
The federal government partially shut down Saturday after Congress failed to pass a spending bill over President Donald Trump’s demands for $5.7 billion for a border wall. The lack of funding for about a quarter of federal agencies affects the departments of Homeland Security, Transportation, Agriculture, State, and Justice and federal national parks. But the impact on the market will likely be minimal.
“The economic implications are very limited, in our view, as the amount of federal spending affected by this shutdown, is a fraction of what it was during the last major shutdown, in 2013,” economists at Goldman Sachs wrote in a note on Tuesday.
This is because Congress has already passed five of the 12 annual appropriations bills. The agencies that have not yet received funding account for about 16% of all federal employees. When funding lapses for all federal departments and agencies, 800,000, or about 40% of all federal employees are furloughed without pay.
Those employees can expect to receive their full back pay when the shutdown ends. So, the interruption usually has a temporary impact on the economy. Goldman Sachs estimates the government shutdown in 2013 reduced real GDP by 0.17% each week in the quarter it occurred, but the real GDP bounced up the same amount in the following quarter after the federal government reopened.
“The upshot is that a shutdown, even if it lasted for a week or more, would have only a very modest impact on first-quarter GDP growth, subtracting perhaps a few tenths at most,” Paul Ashworth, chief U.S. economist of Capital Economics, wrote in a note earlier this year.
Among the economic data that is expected to be released in the coming week, most of them will come out on schedule since the U.S. Department of Labor and the Federal Reserve are unaffected. But data published by the U.S. Department of Commerce, including new home sales and advance goods trade balance, is likely to be delayed by the shutdown.
How long will it last?
The real question is how and when the two parties could reach an agreement. “There will be a shutdown that will last for a very long time,” Trump warned in a tweet Friday morning. “The Democrats now own the shutdown!” He added later in a tweet.
The partial shutdown will last until at least the next full session of the Senate on the 27th. And Congressional Democrats have reasons to not compromise on the issue now, as they will gain greater influence after after the new Congress is seated on January 3.
“With the Democrats set to retake the House in January, there is a clear risk that this shutdown could last for weeks or even months,” Ashworth of Capital Economics wrote in a note this week.
While economists don’t believe the shutdown itself is enough to hammer the economy, they see larger risks ahead as the shutdown may just be the primer of the fiscal debates on spending and the debt limit in 2019. A divided Congress is likely to present new hurdles to raising the debt limit or the spending caps next year.
“It would raise the much bigger risk that Congress fails to lift the debt ceiling again by July. “Ashworth wrote. “There could also be a marked fiscal tightening in October if lawmakers do not extend the higher spending levels agreed in the bipartisan budget deal reached earlier this year.”
Krystal Hu covers technology and trade for Yahoo Finance. Follow her on Twitter.