The economic impact of the recent Federal government shutdown was felt across all industries, but some sectors were hit harder than others. Now that we have a temporary reprieve, we take a look at what happened and draw some “lessons learned” that companies can use to better prepare themselves for future potential economic disruptions.
What just happened?
The recent partial government shutdown was the longest to date. Around 800,000 federal employees and 4 million contractors were furloughed or asked to continue reporting to work without pay.
Compared to the 2008 financial crisis that kicked off the Great Recession, or recent regional disasters, such as the California wildfires or Hurricane Harvey (which brought the Houston area to its knees), the economic effects of the 2018-2019 partial government shutdown hit industry sectors across the nation in unequal and unpredictable ways.
Seemingly by the luck of the draw, some government functions continued to stay open on a “business as usual” basis, thanks to previously passed Congressional appropriation measures. But funding for about one-fourth of government operations ran out in December 2018, leaving the affected agencies with no choice but to furlough workers and close their doors, leaving behind only unpaid skeleton crews whose job functions were deemed “essential” by law, e.g. to safeguard human life or protect government property.
The result was an uneven playing field for the business community that cost some private companies greatly, while other firms were able to continue operation relatively unscathed.
Aerospace and Aviation
Most political commentators point to widespread disruption of the nation’s air transportation system as the underlying reason that the White House suddenly agreed to temporarily end the shutdown for three weeks, starting on January 25, 2019.
In the days leading up to this announcement, flight operations at New York’s LaGuardia airport were at a breaking point, with additional flight delays mounting in Newark, Philadelphia, and Florida that threatened to cascade across the nation. Widespread reports (and unconfirmed rumors) claimed that as many as 10% of the unpaid “essential” TSA security workers were calling in sick each day, forcing temporary terminal closures at Houston’s Bush Intercontinental, Washington Dulles, and Miami International. And the specter of further delays at Hartsfield-Jackson Atlanta International Airport (the world’s busiest) in the days leading up to last Sunday’s Superbowl was certainly on everyone’s mind.
Fortunately, no major safety incidents were reported during the shutdown, either on the ground or in the air. But there was concern about increased workload stress for the nation’s flight controllers as well as the safety impact of curtailed FAA flight inspections for both existing and new flight operations. Delta Airlines, for example, was unable to launch its long-planned fleet of Airbus A310 aircraft (formerly Bombardier C-Series) due to the shutdown. However, Southwest Airlines finagled a way to pay furloughed FAA inspectors (using company funds) to certify three brand new Boeing 737 jets, an unusual arrangement to say the least. Despite this, Southwest was still forced to delay its much-anticipated launch of transpacific flight service to Hawaii.
In the space sector, most NASA workers were deemed “essential” staff and thus asked to work without pay. This was good news for some critical path projects, such as the “Commercial Crew” initiative, which is intended to provide American capability to crew to the International Space Station, which, since the retirement of the Space Shuttle program, has left NASA dependent on Russian rockets to ferry crews into space.
However, some industry analysts fear that the shutdown ordeal will have a negative effect on NASA’s long-term ability to attract and retain highly-sought-after engineers who might be tempted jump ship from government service to land a well-paid private sector job.
In light of recent food supply scares, such as the discovery of contaminated romaine lettuce, consumers and food industry experts alike were holding their collective breath when the Food and Drug Administration (FDA) announced it was furloughing about 40% of its employees, including food inspection workers. However, as the shutdown dragged into the new year and public pressure mounted, the FDA ordered some of its workers to return to work (without pay) to resume monitoring ‘high-risk’ food supplies, such as soft cheeses, seafood, custard-filled bakery products, certain fruits and vegetables, and baby formula.
Fortunately, there have not been any reports of lapses in food safety so far (although this could change). However, the ag sector was hit hard in other ways. For instance, the USDA’s Farm Service Agency was closed for the duration of the shutdown, which cut off farmers’ access to loans, grants, and insurance payments (including disaster claims). This came at a critical time of year when many farmers turn to the federal government for economic forecasts advising them which crops to plant, as well as for loans and guarantees offering financial assistance leading up to the all-important spring planting season. Farmers were also concerned because new programs designed to provide compensation for their lost farm exports to China (which cut back soybean and other crop purchases in response to recent US tariff increases) were also delayed during the shutdown.
The shutdown also led to other unexpected consequences in the food and beverage industry. For example, the closure of the Alcohol and Tobacco Tax and Trade Bureau (TTB) meant that no one could sign off on new operating permits for breweries, which meant that many local craft brewing operations across the country had to postpone opening day until funding was restored.
Energy, including Oil and Gas
Because congressional lawmakers had already approved funding for the Department of Energy (DOE) through September 30, 2019 (which marks the end of the 2019 budget cycle), the DOE was spared the direct effects of the government shutdown.
However, because other departments, such as the Bureau of Land Management’s Fish and Wildlife Service and the Environmental Protection Agency (EPA), were closed by the shutdown, many of the new recently introduced policy changes designed to roll back Obama-era regulations were put on hold, due to the inability to conduct the necessary government hearings necessary to make policy changes.
These regulatory changes, long sought by industry groups, such as the US Chamber of Commerce, including the relaxation of rules governing the release of methane gas during drilling operations, rollbacks of the rules pertaining to the Clean Water Act, and permits for drilling for oil and gas leasing in the Arctic National Wildlife Refuge (ANWR), among many others were delayed by the shutdown.
In one case, efforts by administration officials to classify the work of employees in the Bureau of Offshore Energy Management (BOEM) as “essential” caused a number of lawmakers and opponents of offshore drilling to cry foul, saying any work designed to prepare for the next round of industry oil and gas leases under the Outer Continental Shelf Leasing Act (OCS) program failed to meet the “essential” definition.
Financial Services, Capital Markets, and Insurance
This year was expected to be a hot market for IPOs, with several highly anticipated stock offerings waiting in the wings, including Rackspace, Slack, and Uber. But, to date, 2019 is proving to be a washout, with zero companies going public in January (compared to 17 in January 2018).
Companies couldn’t file for stock offerings because the Securities and Exchange Commission (SEC) remained closed for the duration of the shutdown. (Full disclosure: the SEC is a Formaspace customer, along with many other civilian government and military agencies.) If the shutdown resumes again, sharp financial experts believe they have come up with an IPO filing workaround that may allow new offerings to come to market with or without furloughed SEC employees.
Meanwhile, businesses seeking loan funding from the Small Business Administration (SBA) were out of luck. During the government shutdown, all SBA offices were closed, cutting off crucial access to $2 billion in capital for the nation’s small businesses.
Another crisis was brewing in the housing market over flood insurance. Funding for FEMA’s National Flood Insurance Program (NFIP) ran out, threatening to hold up thousands of real estate transactions across the country. (Most banks won’t issue mortgages on properties at risk of flooding without an NFIP insurance policy in place.) Congress responded by passing an NFIP funding authorization (which was quickly signed into law), yet the day after Christmas, FEMA declared its furloughed employees were unable to process any of the necessary NFIP flood insurance application paperwork. After a huge public outcry, the department relented and recalled employees to process the insurance applications.
Despite this reprieve, mortgage lenders continued to face other hurdles. With IRS workers on furlough, no one could process the IRS 4506-T forms that provide income verification for mortgage applicants. In addition, any home buyer seeking an FHA-backed mortgage was out of luck — with FHA staff out on furlough, new FHA mortgage underwriting came to a halt. Meanwhile, the shutdown led the Department for Housing and Urban Development (HUD) to warn that it would need to suspend reimbursement payments to local housing authorities, who, in turn, pay landlords for low-income housing programs, such as Section 8 and Project Rental Assistance Contracts (PRACs). Local housing authorities were asked to perform some accounting gymnastics to move monies around from future budget years if at all possible.
Healthcare and Medicine
The FDA was greatly affected by the government shutdown, with over 40% of employees sent home on furlough. We touched on the effect this had on the FDA’s food inspection programs earlier. The agency faced a similar situation in the healthcare sector: with so many employees sent home, the FDA was unable to perform its normal level of drug and medical devices inspections. Inspections were cut back to only support those deemed essential. All new drug and medical devices applications were put on hold, including new biologics-based application by Aimmune for their new peanut-derived immunotherapy, whose unfortunately timed application was put on hold the day after it was filed.
Fortunately, most of the major healthcare programs, including Medicare, Medicaid, and ACA programs were unaffected by the shutdown. One important exception was the Indian Health Service (IHS), which falls under the budget of the Interior Department’s Indian Affairs Bureau. IHS services were curtailed, and had the shutdown lasted longer, available funds might have run out.
The nation’s major healthcare companies had other concerns due to the shutdown as well.
For example, furloughs at the IRS meant that it couldn’t begin reconciling the 2018 ACA healthcare subsidies for millions of ACA recipients, an unwelcome delay that’s causing major headaches for healthcare insurance companies trying to close the books on 2018.
Also worth mentioning is the legal status of the ACA law itself, which was recently struck down by a Federal District Court Judge in Ft. Worth, Texas. As it turns out, the appeal itself is also on hold (due to the government shutdown) much to the frustration of the healthcare industry, which wants the case to be resolved quickly (one way or the other) to allow them to make definitive financial plans for the future.
Laboratory Science and Research Projects in Academia
The effect of the government shutdown on laboratory science and research brings home the arbitrary nature of congressional budget appropriations.
The Department of Energy (DOE) was funded. So too were most of the activities of the Centers for Disease Control and Prevention (CDC) and the National Institutes of Health (NIH).
But, as we mentioned earlier, the FDA couldn’t approve any new drug and medical devices applications, environmental research at the EPA was mothballed, and much of NASA was shut down. So, too, were the offices of the National Oceanic and Atmospheric Administration (NOAA), which led to the embarrassing absence of over 800 federal employees unable to make presentations at the annual American Meteorological Society conference in Phoenix.
Many academic research activities were put at risk due to the temporary closure of the National Science Foundation (NSF), which funds $7.5 billion worth of research grants for college and university faculty across the country.
The National Endowment for the Humanities (NEH) was also shuttered; it’s a key source of funding for humanities research and education programs.
Manufacturing and Logistics
Continuing with our theme of unequal effects of the recent government shutdown, the manufacturing and logistics sectors faced uneven waters.
There was some good news. Activities surrounding negotiations of the generation of the NAFTA trade agreement between the US, Canada, and Mexico (dubbed USMCA) continues to be funded by the office of the United States Trade Representative (albeit with a smaller number of federal employees traveling to the recent round of negotiations in Montreal).
On the other hand, companies seeking redress for trade disputes needed to be patient. Personnel furloughs at the U.S. Department of Commerce’s International Trade Administration delayed investigations into allegations of anti-dumping and countervailing duties. Likewise, rulings and decisions made by the Customs and Border Protection were put on hold during the shutdown.
The car manufacturing industry also faced some serious challenges due to the furlough of EPA employees, which delayed the testing and certification of new vehicle designs to ensure compliance with the Clean Air Act. (If cars and trucks can’t pass the certification, they can’t be sold, as Dodge learned earlier in 2018 when some of its newly redesigned Ram Trucks failed pollution tests, putting a dent in their plans to become the nation’s #2 truck manufacturer.)
Military Armed Services, Law Enforcement, and the Justice Department
The Coast Guard was the military service hardest hit the government shutdown, with thousands of “Coasties” asked to work without pay. (Fortunately, a delayed paycheck was issued on December 31, 2019.)
Meanwhile, in law enforcement, the FBI bore the brunt of the shutdown. (The FBI Director, Christopher Wray, made some extraordinarily choice remarks about the shutdown in a video message to FBI employees.)
Companies with business before Federal courts found conflicting opinions about whether legal proceedings were to continue or not during the shutdown; with many Federal judges making the decision to delay all civil litigation cases before the court.
Most immigration and asylum cases before the Federal courts were also delayed.
Tax and Regulatory Compliance
Employers are now required to verify that all new-hire employees are entitled to work legally using the online E-Verify system within the first three days of employment. Infuriatingly, the E-Verify system was unavailable during the shutdown, causing general confusion for businesses required to submit the required I-9 form to the U.S. Citizenship and Immigration Services (USCIS).
Another important law affecting all businesses is the rollout of the new Tax Cuts and Jobs Act (TCJA), which went into effect January 1, 2018; it introduces quite a few changes in the tax code for both businesses and individuals.
Sending thousands of IRS employees home on furlough during December and January was unfortunate timing, given that many business tax accountants were seeking to get detailed guidance from the IRS on how to interpret many of the new rules of the revised tax code.
The IRS also initially decided to hold off on processing 2018 income tax returns due to the shutdown, which would have delayed refund checks to millions of taxpayers. Given this politically untenable position, the IRS relented and brought back workers on an “essential” basis to begin processing the tax returns.
How to Prepare for What’s Coming Next
The government shutdown is over. Or is it? After the current week-long reprieve, there is a threat that the recent shutdown may return.
Businesses need to prepare for the next one.
- Try to diversify your customer base to avoid overexposure to government contracts.
- Bump up your reserve funds or try to arrange for increased lines of credit.
- Stay in good stead with vendors, as you may need to ask for extended terms to cope with cash flow issues caused by a shutdown.
We also recommend looking beyond the shores of the US for other potential government policy risks on the horizon, such as Brexit, the United Kingdom’s exit from the European Union. (See our previous article on this topic.)
The current negotiations between the UK and the EU have heightened the risk of a “no-deal” Brexit, which has the potential to create a wide-spread economic shock to trade relationships and supply-chains across the world.
You can Trust Formaspace
We’d like welcome back some of our special clients, such as the employees of the SEC, who were directly impacted by the recent government shutdown.
Rest assured, Formaspace was able to continue all our manufacturing operations – with no disruptions – at our factory headquarters in Austin, Texas.
If you can imagine it, we can build it.
Remember, 3 out of 4 of our private sector customers are listed on Fortune 500, and we serve nearly all departments in the Federal government. We also count over 350 colleges and universities among our satisfied clients, including nearly all of the Ivy League schools.
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