Shutdown Hitting Private Sector As Defense Contractors Furlough Workers
The effects of the government shutdown are starting to be felt in the private sector:
Lockheed Martin became the latest government contractor to announce furloughs due to the federal government shutdown.
The defense contractor said it will furlough 3,000 workers starting Monday, Oct. 7.
“I’m disappointed that we must take these actions, and we continue to encourage our lawmakers to come together to pass a funding bill that will end this shutdown,” said CEO Marillyn A. Hewson. She said that workers would be allowed to use vacation time if they have it available so that their pay and benefits would not be affected.
Lockheed Martin has 120,000 employees, 95% of whom are based in the United States. Its contracts with the federal government accounted for nearly $39 billion in 2012, which represented more than 80% of its overall revenue.
Earlier this week United Technologies announced 2,000 of its workers will likely be furloughed starting next week. Those affected make Black Hawk helicopters through its Sikorsky Aircraft subsidiary, as well as aircraft control systems and a variety of other high-tech products. United Technologies said furloughs could grow to 4,000 if the shutdown continues through next week, and 5,000 if it goes into next month.
The impact of the shutdown are also starting to be felt outside the defense contracting industry, including at Boeing where the delivery of aircraft to airlines around the world will likely be delayed due to the fact that the FAA inspectors that must certify the aircraft are all currently on furlough. Boeing is saying that the slowdown in deliveries won’t impact production or lead to furloughs, although that obviously may not be the case for the military work that Boeing does.
These, of course, are just some of the most prominent examples of the economic impact that the shutdown has already started to have. Local news here in the D.C. area has already highlighted the stories of smaller contractors being impacted by the shutdown, as well as the myriad of tangential businesses ranging from restaurants to the Metro System that are seeing a significant drop off in business since Tuesday when the shutdown went into effect. Below that, of course, are the people who work for these businesses who rely for their own wages on customers who aren’t showing up for work these days. There are similar reports from across the country, especially from private businesses that make their money in many of the nation’s largest National Parks on guided nature hikes, fishing expeditions, or kayaking and river rafting tours. The longer the shutdown goes on and the particular departments of the government that they cater to remain largely shuttered, the larger the impact on the economy will be.
According to some analysts, an extended shutdown could have a significant impact on an already weak economy:
“Government shutdowns have been surprisingly common since 1976,” writes Guy LeBas, chief fixed-income strategist for Janney Capital Markets, in a note to clients. He points out that the current shutdown is actually the 18th such occurrence since 1976. The vast majority of standoffs, however, have lasted just a few days. Given the apparent distance between Democrats’ and Republicans’ positions, analysts have been using the most recent 1995-96 shutdown (which lasted a total of 26 days) as a yardstick against which to analyze the current situation.
LeBas estimates that if the 2013 shutdown lasts a similarly long time, it could shave 0.8% from economic growth in the current quarter. The effects would become more severe the longer the shutdown lasts. This reduction in economic growth would come primarily from roughly 800,000 federal workers being put on furlough and left without paychecks to spend. But as analysts at Macroeconomic Advisers point out, the long-term effect on the economy will have as much to do with how the budget impasse is resolved as how long it lasts. They predict that a two-week government shutdown will shave 0.3% from economic growth, but that the effect will be reversed in the following quarter if the government ends up instituting back pay for workers who were furloughed, as it did in last time.
In other words, the overall impact of a government shutdown on the economy will be muted, as long as Democrats and Republicans are able to come to an agreement relatively quickly. But that doesn’t mean that the economy will walk away from this showdown unscathed. “The real economic cost, which is extremely hard to measure, comes from heightened uncertainty,” writes LeBas. “Greater uncertainty will create hesitancy on the part of businesses to embark on new projects, and encourage consumers … to save rather than spend.”
The larger economic impact, of course, would come from a failure to increase the debt ceiling that places the government in the position of trying to decide which obligations should be paid out of the limited funds available without borrowing and those which should go unpaid. Quite obviously, those people who are owed money by the Federal Government and don’t get paid are going to be the ones most severely impacted. However, the uncertainty that would be created in such an event would be event more severe than anything a shutdown might create, although one wonders just what happens if both are going on at the same time.