It was another quiet week on the data front, as the government shutdown extended to its tenth day as of this writing, with no end in sight. That said, one overlooked segment of the population may be having its voice heard, as Washington appears ready to recall some workers to publish the consumer price index, which prior to the shutdown was scheduled for October 15. Why? It’s needed to calculate the cost-of-living adjustments for Social Security recipients. If you want to start a civil war, one way is to stonewall seniors about the COLA they are entitled to receive next year. Keep in mind that this demographic constitutes one of the most steadfast voting blocs that only the most reckless politician would dare to affront.

That said, the vast majority of the public has a vested interest in knowing what’s going on with the economy in general, much less inflation. In the absence of fresh data, policy makers are operating in a fog of uncertainty that heightens the risk of policy errors. Importantly, the longer the shutdown lasts, the greater the impact on the economy. According to reliable studies, each week of a shutdown shaves 0.2-0.3 percent from the economy’s growth rate. Fortunately, most shutdowns last for only a few days and, hence, have only minimal effects on activity. But of the 20 previous times that Washington went dark due to an impasse over funding since the late 1970s, 7 of them lasted 10 days or more. The current episode is the eleventh, and still counting, albeit it has a ways to go before catching the 34-day installment in 2019 that started in December 2018.

Not coincidentally, that last shutdown and the drama leading up to it almost brought the economy to a standstill, as GDP downshifted to a growth rate of 0.6 percent in the fourth quarter of 2018 from 2.5 percent in the third. But growth rebounded when the government doors reopened, as GDP shot back up to a 2.5 percent growth rate in the first quarter of 2019 and accelerated from there until Covid-19 struck. That experience confirms the general perception that the economy typically recovers all lost output and jobs when government operations return to normal. We think that will be the case this time as well, assuming the shutdown ends relatively soon, and policy makers gain more clarity on the economic tea leaves. 

As it is, there is little reason to for the Federal Reserve to diverge from its stance that prevailed prior to the shutdown. At its September policy meeting, the Fed cut its short-term policy rate by a quarter of a percentage point and expected to lower rates two more times this year, one in each of the two remaining meetings. The next gathering is scheduled for October 30-31 and unless the rescheduled CPI report, now expected to be released on October 24, reveals a sharp jump in inflation, another cut should be forthcoming. Recall that the Fed expressed mounting concern over the weakening job market at the last meeting and believed that the risk of a further deterioration in labor conditions outweighed the risk of a sustained inflation outbreak. 

To be sure, with no official data on the job market beyond August policymakers are missing critical information that would throw more light on labor conditions since that meeting. But we know that that more than 600 thousand Federal workers have been furloughed and won’t get paid until the government reopens. As in the past, this cohort will pull back spending until they receive their back pay, echoing the broader slowdown and rebound seen in economic activity in past shutdowns. However, the president has threatened to not provide back pay to some of these workers, which adds another layer of uncertainty and financial insecurity that could lead to a more severe spending cutback. What’s more, the longer the shutdown lasts even those government workers assured of getting back pay may run out of savings to support spending; depending on their so-called “burn rate” that could make the prospective cutback more severe. We suspect that if the government is still at an impasse by the late-October policy meeting, the Fed’s fear of a jobs meltdown would intensify.

That said, as we noted last week, policy makers are not flying completely blind as the private sector does provide insights into evolving trends in the job market. One of those is the popular job site, Indeed, which provides data on job posting among other relevant information that tracks business demand for workers. The largest and most reliable source of information on this score is of course the Labor Department’s Jobs Opening and Labor Turnover Survey (the JOLTS report) which comes out monthly and, like the official jobs report, is unavailable because of the shutdown. But the data through August reveals that the job opening rate dropped significantly over the summer and at last count (at the end of August) equaled the lowest level since June 2020. 

The Indeed site, while less comprehensive than the BLS survey which canvasses a much larger swath of the population, does provide more current data – and it clearly tracks “more of the same”. That is, job postings are shrinking as employers are holding off on new hiring for a variety of reasons, including uncertainty over sales prospects and narrowing margins due at least partly to rising tariff-related costs. The good news so far is the layoffs in the private sector remain subdued. Again, the main source that monitors the trend in layoffs would be the Labor Department’s weekly report on applications for jobless benefits, which like other government reports, are not available. However, raw data from State unemployment offices are available, and after modifying them with our own seasonal factors suggest that there has been little upward trend in filings in recent weeks.

The one exception, unsurprisingly, is for the furloughed Federal workers, who are now eligible to file for unemployment and, as the chart shows, are beginning to do so in droves. It’s only the first week of the shutdown, and the spike in the latest week is the tip of the iceberg. Out-of- work Federal employees file for benefits under a separate government-run program.  The main difference between them and unemployed workers in the private sector is that they must repay their benefits once their paychecks are restored at the end of the shutdown. However, with the president’s threat to keep some furloughed workers off the payroll permanently, odds are more of them will be collecting benefits for some time. 

Importantly, when those workers apply for jobs in the private sector, they will find it rough going as the decline in job vacancies suggest. Hence, unless there is a burst of hiring activity after the shutdown ends, the official unemployment rate will come under upward pressure. The Fed can do little to spur hiring by the Federal government, but it can in the private sector by lowering borrowing costs. That’s another reason the Fed is likely to put through more rate cuts this year and next year as well.