By Patti Murphy
The U.S. economy is experiencing its longest economic expansion in history – 116 months and counting. Many economists expect the economy to continue chugging along. However, there have been and may be future bumps in the road, as evidenced by the tug of war in Washington over funding for a wall on the nation's southern border.
Steven Blitz, chief U.S. economist at TS Lombard, said the five-week government shutdown clearly affected overall economic conditions. "The [federal government] shutdown is going to become a big thing," he said during a Jan. 14, 2019, meeting with reporters at the National Retail Federation Big Show. "Spending goes away and will not be replenished."
An estimated 800,000 federal workers were furloughed or forced to work without pay because they were deemed "essential" employees during the partial government shutdown, which ended on Jan. 25. While all eventually were paid, in many cases that took up to two weeks. The shutdown also put at least 1 million federal contractors out of work, and throttled federal grant payments to several million additional individuals and firms, according to published reports.
In Washington, D.C., once bustling restaurants were practically deserted, and in some cases were forced to lay off staff. But it wasn't just restaurants that lost sales, and it wasn't just in Washington. "We had a carwash here [operating] close to a government facility that lost money," said Dee Karawadra, president of Memphis-based Impact PaySystem.
Grocers were particularly hard hit, as most of the U.S. Department of Agriculture Food and Nutrition Service staff were furloughed. The FNS overseas federal initiatives such as the Supplemental Nutrition Assistance Program. The National Grocers Association said in a Jan. 17 statement that "2,500 retailers across the country have experienced a lapse in their SNAP licenses, and many other retailers have been unable to acquire SNAP licenses for new or purchased stores."
The total impact on retail sales remains uncertain. The U.S. Department of Commerce, which tracks and reports on key indicators (retail sales and personal income and spending data) was one of the shuttered agencies, and as of February 12 it had not yet published data for December.
To understand the implications of lost or delayed paychecks, consider this revelation from the Federal Reserve: 40 percent of adult Americans in 2017 were unable to cover an unexpected expense of $400 without selling something or borrowing money. "This is an improvement from half of adults in 2013 being ill-prepared for such an expense," the Fed wrote. But it reflects the fact significant numbers of Americans live paycheck to paycheck. The Fed's revelation was contained in its 2017 Report on the Economic Well Being of U.S. Households in 2017.
Scores of banks and credit unions came to the aid of federal employees with low-cost, short-term loans. "We understand the financial pressure that many of our customers who serve our nation are now facing and we're here to help," said Andrew Cecere, chairman, president and CEO of U.S. Bank. Not surprisingly, payday lenders fared well during the shutdown. One such lender, World Acceptance Corp., saw its stock price rise by nearly 19 percent in January.
According to the Congressional Budget Office, the shutdown diminished the nation's real gross domestic product (GDP) for the first quarter of 2019 by $8 billion, or about 0.2 percent. That's on top of a $3 billion (or 0.1 percent) reduction in real GDP for the fourth quarter of 2018. And while some GDP lost during the shutdown is expected to be recovered eventually, the CBO estimated about $3 billion in foregone economic activity (or an estimated 0.02 percent of 2019 GDP) will never be recovered.
"Underlying those effects on the overall economy are much more significant effects on individual businesses and workers," CBO Director Keith Hall wrote in a January report. "Among those who experienced the largest and most direct negative effects are federal workers who faced delayed compensation and private-sector entities that lost business. Some of those private-sector entities will never recoup that lost income."
Hall said the shutdown "dampened economic activity mainly because of the loss of furloughed federal workers' contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which thereby dampened private-sector activity)." But he added that the agency's estimates are "subject to considerable uncertainty." For example, Hall noted, the CBO cannot say for certain how federal workers and contractors adjusted spending during the five weeks they went without paychecks.
George Sarantopoulos, president of Access One ATM Inc., said his firm saw a "significant drop" in ATM transactions during the five-week shutdown. "We have a sizable portfolio in the D.C. area, and there's no question that there was a drop," he said.
Mark Cerminaro, chief revenue officer at Rapid Finance, said, "A lot of businesses not directly tied to the [federal] government – for example restaurants, hotels and livery services – saw some very big impacts which won't be recouped." Formerly known as RapidAdvance, Rapid Finance is a Bethesda, Md.-based firm that specializes in lending solutions (like merchant cash advances) for small businesses. "There are so many ripple effects," Cerminaro added. "The small business community is reliant on people spending money."
Small businesses also have borrowing needs, and many small business loans are facilitated and guaranteed through the Small Business Administration, which was shuttered in December and January.
One such business is Port City Brewing Co. in Alexandria, Va. "The shutdown affected Port City by furloughing SBA staff who were working on a loan application for a new bottling line. "Because of the closure, we were unable to lock in an interest rate, which could increase the cost of our loan by thousands of dollars," Bill Butcher, Port City's founder, told members of the House Small Business Committee.
"Not only are small business owners unable to get loans through the SBA during the shutdown, but there will be a significant backlog once the SBA is operational again," Ben Gold, president of QuickBridge, a small business lender, said in a January 24 video distributed to reporters. Among small businesses surveyed by QuickBridge in January, 31 percent said the shutdown was having an impact on sales; 30 percent said they expected tax refund delays (which can affect consumer spending) and hiring slowdowns.
Many businesses that sell to the federal government saw sales plummet. "The government shutdown had a measurable impact on my business, my employees, and I imagine on all small businesses delivering services or products to the federal government," Heidi Gerding, CEO of HeiTech Services in Landover, Md., told the House Small Business Committee. "Although some small businesses are claiming that they had little impact, I can only speculate that they don't know the full impact to their business or [they don't] know how to calculate it and/or it is too much work for them to track."
Many small businesses, and the intermediaries that help these businesses secure SBA backing, have turned to alternative lenders, like Rapid Finance and QuickBridge. "They're looking for solutions that can meet short-term capital needs and serve as a bridge to the long term," Cerminaro said.
Complicating matters, the legislation passed by Congress in January ending the shutdown was only a temporary fix intended to keep agencies running through the middle of February. Even if a longer-term agreement is reached between Congress and the White House the backlog at SBA could leave many small businesses in a lurch. Plus, the contentious relationship between Congress and the White House could trigger future shutdowns.
"Lenders and borrowers are trying to figure out how to be better prepared should this happen again," Cerminaro noted.
Despite the uncertainty created by the government shutdown, as well as stock market volatility and the ongoing trade war, the NRF has said it is optimistic about retail spending this year. It is forecasting retail sales growth between 3.8 percent and 4.4 percent and sales totalsl between $3.82 trillion and $3.84 trillion this year.
"We believe the underlying state of the economy is sound," said Matthew Shay, NRF president and CEO. "The biggest priority is to ensure that our economy continues to grow and to avoid self-inflicted wounds. It's time for artificial problems like trade wars and shutdowns to end, and to focus on prosperity, not politics."
Preliminary estimates indicate retail sales in 2018 grew 4.6 percent over 2017 to total $3.68 trillion, which beat the NRF's forecast of 4.5 percent growth. Online and other non-store sales were up 10.4 percent and totaled $682.8 billion for 2018. The NRF said it expects online sales to continue growing at that pace this year. NRF numbers exclude automobile, gas station and restaurant sales. The NRF said its 2018 sales numbers are based on Commerce Department data through November and NRF estimates for December.
Spending data published by Mastercard revealed that retailers racked up more than $850 billion in sales between Thanksgiving and Christmas. That's a 5.1 percent increase over 2017 year-end holiday spending, making it the best holiday season for retailers in six years. This despite the government shutdown starting before the season ended. The online channel registered the largest increase at 19.1 percent over 2017, Mastercard said. In terms of shopping categories, apparel and home improvement saw the best growth, increasing 7.9 percent and 9.0 percent, respectively, over 2017 sales totals. "From shopping aisles to online carts, consumer confidence translated into holiday cheer for retail," said Steve Sadove, senior Mastercard adviser and former CEO of Saks Inc.
Despite strong consumer spending, economists warn that recession fears linger. "Traditional indicators point to a recession, perhaps in the second half of 2019 or 2020," Constance Hunter, principal and chief economist at KPMG LLC, told reporters at the NRF Big Show. She suggested continued strong consumer spending will be "the ballast for keeping any recession from getting worse."
Blitz, the economist with TS Lombard, predicted any recession "will most likely occur in 2021."
Patti Murphy is senior editor at The Green Sheet and president of ProScribes Inc. Follow her on Twitter @GS_PayMaven.
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