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How Does the Government Shutdown Impact the Economy?

Government Shutdown 2019

We have now experienced the longest government shutdown on record. This has disrupted nine Federal Departments, and if a Federal worker is deemed “essential” they must work without pay, while others are either furloughed or placed on temporary leave. While the shutdown is undoubtedly affecting many people’s lives, another question we are getting is: how does a government shutdown, especially one as long as this, impact the overall economy?

Does it Impact the Overall Economy?

So far, it has had minimal impact on the overall US economy, but there has been a clear disruption in certain pockets of the economy and significant impacts on the individual government workers affected. Eventually the market would not be able to ignore it. Some estimates show a 0.5% hit to GDP if the shutdown lasts through January.

History has shown past shutdowns have had very little impact on stock markets, but the longer this shutdown lingers, the more the risks increase. We are continuing to monitor the situation, but are cautiously optimistic the situation will be resolved with minimal market impact. If it lasts into February we expect it would start to cause more volatility into already jittery markets, but would remain just one factor.

If the shutdown lasts into February, it may cause more volatility.

The Importance of an Emergency Fund

During the course of this shutdown, many government workers have gone without pay. Unexpected events that affect our cashflow can happen — and this is why it’s so important to have an emergency fund. Personal Capital generally recommends that people have around 3-6 months of funds available to them for a “just-in-case” scenario. Generally, an FDIC-insured savings vehicle with a meaningful interest rate is a good place to house emergency funds. High yield savings accounts and bonds provide significantly higher returns than a checking or low yield savings account.

Read More: Market Commentary

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