How the government shutdown could hurt retail
Furloughed workers, veterans and others dependent on federal services are the real victims of the shutdown. But it's not doing anyone any favors.
If the government shutdown doesn't end on Friday, it will be the longest in U.S. history. The more it drags on, the more damage it will do, according to experts.
At the moment, furloughed workers and their families, along with veterans and others depending on federal services, are the real victims of an ongoing stalemate between the Trump Administration and Congress over funding a wall at the U.S.-Mexico border, that at the moment seems intractable. On Thursday, protests erupted in front of AFL-CIO headquarters, not far from the White House.
"Notably, 800K federal employees have been furloughed," UBS Analyst Michael Lasser wrote in comments emailed to Retail Dive. "This doesn't include the impact from private businesses & contractors levered to the government. As such, there will likely be a drag on consumption should the shutdown persist in the upcoming weeks or months. Further, the shutdown could impact the timing of government disbursements. Thus, many retailers could be impacted."
In addition to the government employees either not working or working without pay, there are many others who work for subcontractors that are losing business. Many of them are being forced to dip into savings or take out loans and are likely to be spending less.
That means that businesses in areas with a lot of these workers may also start to suffer. Some, including cab companies, gas stations, car repair shops and national parks, restaurants and retailers, already are, according to experts, social media reports and media reports.
"It surely can't be good. There are 800,000 people who are not receiving their paychecks," Lawrence White, an economics professor at New York University's Stern School of Business, told Retail Dive in an interview. "And three quarters of them — I think that's the fraction — are in the D.C. area and there are pockets outside of D.C., so those are the retailers feeling it. There are all kinds of cascading ramifications to this thing — none of them look good. None of them are happy outcomes for anybody."
The fact that the shutdown is lingering is part of the problem, according to Courtney Rickert McCaffrey, manager of thought leadership in strategy and management consulting firm A.T. Kearney's Global Business Policy Council. "The psychological and real economic impact of 800,000 federal employees not receiving their paychecks will begin to filter throughout the economy," she told Retail Dive in an email. "Many households are likely already cutting down on spending, and the longer the shutdown goes on, the more such frugality will spread. That will affect businesses that usually serve these workers, including restaurants and retail stores."
In previous shutdowns, the IRS was prohibited from sending out tax refunds, but this week the agency said refunds would go out, although some taxpayers may find it difficult to get their returns completed.
That could undermine a major source of spending, considering that many Americans use their returns to fund major purchases like appliances. A refund delay in 2016 sent some retail sales into a tailspin — even sneaker sales suffered "the single worst decline I've seen in 19 years" as a result, Matt Powell, NPD Group vice president and senior industry advisor, told Retail Dive in an email. "Footlocker called this out on their Q1 conference call. A few years ago, checks were also delayed and business was negatively affected."
Plenty of companies lament the governmental hoops they must jump through to conduct business, but even worse than bureaucratic paperwork is bureaucratic paperwork that isn't getting processed. A shutdown means that several regulatory necessities of running a business are cut off, and the consequences could throw a wrench into retailers' and restaurants' operations, according to A.T. Kearney's McCaffrey.
The E-Verify system, set up to check a potential employee's immigration and work eligibility, is offline, for example, which "could bite retailers, particularly in such a tight labor market," she told Retail Dive in an email. "The Alcohol and Tobacco Tax and Trade Bureau is not approving any new beer labels, so retailers expecting shipments of new craft beers will need to fill their shelves with something else. And a potential risk to retailers stems from the fact that the Food and Drug Administration has not been conducting its usual inspections of food processing sites. Any contamination could move throughout the supply chain and into retail locations before any alarms go off, raising the risk of foodborne outbreaks."
The shutdown is holding up loans from the Small Business Administration, putting smaller businesses of all types at risk. The Department of Justice, meanwhile, said this week that the shutdown, which has meant a cease in funding of its work on antitrust cases, could delay its final work on the merger between CVS Health and health insurer Aetna, which is approved but incomplete, Reuters reported.
In some ways the shutdown couldn't be timed more terribly. There are already signs that the robust economy and consumer confidence that helped fuel record holiday sales may be receding somewhat, and a protracted shutdown could begin to fray consumers' nerves.
"I doubt consumers consciously connect the shutdown to their spending decisions, but the fact that hundreds of thousands of workers — maybe your friends and neighbors — are now not receiving a paycheck does have an impact on the real and perceived strength of the economy," Logan Finucan, senior policy analyst at Access Partnership, a global consulting firm specialized in technology policy issues. "Layered on top of a narrative that the economy may already be fragile, that probably has some marginal dampening effect on spending."
While the initial effects are to local economies, they'll eventually broaden, Jason Jackson, professor of supply chain management at Purdue University Global, told Retail Dive in an email. "As this continues, with each day it will grow outward from these related-government sources to impact deeper and further elements of the supply chain."
That's true even though Customs and Border Protection continues to operate, according to Finucan. "Supply chains shouldn't face major challenges, but the shutdown could slow down clearances," he said. "The lack of pay has a serious impact on morale. If this continues, we can probably expect slowdowns and possible disruptions if some employees refuse to work."
In short, the shutdown is tapping the economy's brakes, if only a little, warned Stern's White. "It's just adding corrosiveness to the general climate, and it's adding friction," he said. "As an economist — unless you want to stop the car, in which case you want to apply as much friction as possible — that's not a good thing."
But he and others said that the economy is strong, and that long term impacts from a shutdown even this long are unlikely. "The US economy still has a lot of momentum, so a short government shutdown would not have a big impact," McCaffrey said. "But the longer the shutdown persists, the more economic pain will be inflicted. There are a variety of short-term distortions that would hit growth this year. And longer term, a protracted government shutdown would be detrimental for employee morale, dampening the productivity of the federal workforce and creating ongoing delays for business approvals."
How retail could help
By far the worst fallout from the shutdown is the toll in human terms, and not just the pain of federal workers. The benefits of the Supplemental Nutrition Assistance Program, (which provides food and other necessities to impoverished families), for example, are set to run out in February, should the shutdown last that long, and rent aid and other social safety net programs for children, veterans and others are running out of resources as many agencies remain unstaffed, according to the Washington Post.
"There is the human side of this, those dedicated to public service working without pay, for our general safety and benefit, who still need to pay bills, and have no promise of gaining back this lost pay," Jackson said. "Disabled Military Veterans, and Veterans going to university on the GI Bill, are part of the population we should be more immediately concerned for with the shutdown, as it relates to government generated checks. They may have young children and need the money for this month's rent."
Although it would cost them, retailers could help, White said. Chef José Andrés in Washington and restaurateurs elsewhere are providing an example by feeding unpaid workers while the shutdown lasts.
"I would hope to see a lot of creativity on the part of retailers, not only of goods but of services as well, in accommodating the difficulties that their federal employee customers are experiencing," he said. "The longer it goes, the more hardship it imposes. One possible strategy would be to figure out some kind of special credit or grace periods on store purchases. That's obviously a risk for the retailers, and then that starts imposing liquidity problems for the retailer. My guess is that it's a blip that you recover from — if you stay with the customer, the customer is likely to stay with you."
Follow Daphne Howland on Twitter