As the United States enters its second week of a government shutdown, fears are mounting as to what the economic impact of the dysfunction in Washington will truly be. Personally, I have heard everything from the government shutdown being a good thing for the economy to the United States possibly slipping back into recession.
What the numbers say, and what really matters, is that this shutdown could have a noticeable impact upon the U.S. economy, particularly in the retail industry.
800,000 furloughed, $300 million lost daily
As politicians failed to strike a deal to avoid a government shutdown roughly a week ago, roughly 800,000 federal workers were furloughed immediately. This 800,000 constitutes over a third of the 2.1 million civilian federal workers that the government employs. This figure means that the government is the country's largest employer. To put the scale of these initial furloughs into perspective, they were "equivalent to the combined workforces of Target, General Motors, ExxonMobil, and Google."
Fortunately, this number will nearly be cut in half now as Defense Secretary Chuck Hagel called back all of the 350,000 furloughed civilian employees of the Defense Department over the weekend.
Still, the economic impact of the remaining furloughs is expected to be noticeable. According to IHS Global Insight economist Doug Handler, 0.2 percentage points of the gross domestic product will be shaved off every week, or about $300 million per day out of the $15.7 trillion the U.S. economy brings in annually. Handler added that the economic impact could grow as the shutdown drags on. "If this continues for an extended period of time then the people dependent upon government services, either as in input or as a customer, are going to have more difficulties doing business, will see inefficiencies and may even start laying off other people, and that will increase the 0.2% per week impact."
Washington dysfunction threatens to steal Christmas
For the roughly 450,000 who still have yet to be called back, the bills will continue to pile up. This will likely force consumers to push back unnecessary purchases. This could have not have come at a worse time for retailers, who are just beginning to ramp up for their all-important holiday shopping seasons.
On Thursday, Oct. 3, the National Retail Federation released its 2013 holiday shopping season forecast. The NRF forecasted sales in the months of November and December to rise 3.9% to $602.1 billion this year, higher than a 3.5% gain over the same time period a year ago. NRF's President and Chief Executive Officer Matthew Shay made it a clear, however, that this forecast "is also somewhat hinging on Congress and the Administration's actions over the next 45 days; without action, we face the potential of losing the faith of Americans have in their leaders, and the pursuant decrease in consumer confidence."
Privately-collected consumer confidence gauges such as the Gallup Daily U.S. Economic Confidence Index have already displayed sharp declines in consumer confidence, with this particular index falling from -15 to -35 over the course of the past week, a volatile move.
How to position your money
Whether or not Congress and President Obama are going to be able to come together to make a deal anytime in the near future is left to speculation. One thing that is certain, though, is that the retail industry is going to be affected by this ordeal. If the holiday season is threatened, a time which makes up anywhere from 20% to 40% of retailer's annual sales, investors could be in for a bumpy ride.
In particular, shareholders of Macy's (M -2.03%), Target (TGT -0.54%), and Wal-Mart (WMT 0.57%) could feel a great deal of pain. All of these companies primarily focus on the middle-range consumer, encompassing the majority of government workers, which, as of Sep. 2012, made on average $78,467 a year, according to the Office of Personnel Management.
Yet Macy's, Target, and Wal-Mart all possess sterling fundamentals that should help them wade through this short-term weakness in the retail industry. All trade with price to earnings ratios under 20--12.34, 15.22, and 14.60, respectively--and carry 2%+ yielding dividends; 2.35%, 2.72%, and 2.51%, respectively. Even more important, all are expecting robust growth in earnings per share over the next couple of years. Analysts expect Target and Wal-Mart to grow EPS 12%-13% from 2013 to 2015. Over the same time period, 33% growth is projected for Macy's.
While traditional retailers like those above may take the brunt of the damage stemming from this debacle, a hidden gem in all of this are online retailers, with none other than Amazon.com (AMZN -1.65%) leading the way. On Wednesday, Oct. 2, Shop.org released its online holiday shopping forecast, which projected sales in November and December rising between 13% and 15% year over year, to as much as $97 billion. Even with government problems, Amazon is expecting robust growth this holiday season.
The Foolish bottom line
I have no idea if a deal to end the government shutdown will be struck in Washington anytime soon. I do know that even if the shutdown ended tomorrow, the lingering economic impacts will be noticeable, especially in the retail industry.
The longer the politicians bicker, the greater the probability that the holiday season will be disappointing for retailers. Bucking this trend is Amazon, which, while stronger than its traditional competitors, is not immune to downturns in consumer confidence. Thus, investors must tread lightly entering this holiday season.
