The Pouting Pundits of Pessimism are at it again. After the fiscal cliff and the debt downgrade didn’t produce calamity for the economy, now it’s the government shutdown. Some say that the furloughing of 800,000 federal employees will have a significant negative impact on economic growth in the months ahead. In fact, one firm is saying that as long as the partial shutdown continues, GDP growth will fall by 0.1 points per week – and this is an additive factor meaning that the shutdown will subtract at least 5% from GDP if it lasts a year.

We think this is an overstatement in the extreme. In fact, we doubt the economy will show any negative growth as the result of the shutdown. The economy has lost jobs before and continued to grow. As the table shows, (click here for the table) Nonfarm payrolls fell by 1.5 million over the 3 month period of April-June 2009, and yet the economy continued to move right along, with 4.3% growth in retail sales over the following six months (see other data in table). And in 2010, a total of 735,000 government workers were laid off after the Census during a 4-month period from June to September 2010. The economy continued to grow.

The big difference between what happened in 2009 and 2010, was that those layoffs were permanent, while today’s 800,000 furloughed workers will most likely get paid back for missed work when this budget battle is over. In 17 previous government shutdowns, employees were paid in full. We expect this time to be no different and expect that these workers look at this as a paid vacation.

What we are saying is that those who fear this government shutdown are not paying attention to history. Moreover, they are thinking like Keynesians. When government no longer borrows to pay for government, there are investors who must find something else to do with their dollars. For example, if the government does not sell bonds to China to fund the Department of Commerce, (in which 86% of employees are furloughed) then China will need to find something else to do with that money. Maybe China will buy corporate bonds, or stocks or Boeing aircraft. In other words, the shutdown allows money that would have been diverted to the government to be kept in the private sector. This may actually lift growth and profits in the quarters ahead.

Don’t fret the shutdown.

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