Most government shutdowns are fairly brief and have only small impacts on the economy, markets and mortgage rates. But there's a risk this one may be different.
The good news for those of us who want lower mortgage rates is that economic damage done by shutdowns typically tends to help rates. "Investors flock to the safety of bonds in times of economic uncertainty, which leads to lower bond yields," says U.S. News. That report continues, "To put it simply, bond yields (and thus mortgage rates) tend to be higher when the economy is strong and lower when the economy shows signs of weakness."
Bond yields influence mortgage rates more than any other single factor. CNBC concurs with U.S. News, with one headline reading, "During shutdown, mortgage rates may fall."
Why This Time Could Be Different
There are two main reasons why some worry the current government shutdown may have more serious effects than previous ones:
- It may last longer than some or all previous ones. Most are brief, but "Now may not be the time to lean on precedents for reassurance; a record 34-day shutdown centering around the border wall occurred in President Trump's first term that might make you wary," says Yahoo! Finance.
- The government seems to be seeing this as an opportunity to make substantive economic changes by "halting billions of dollars in funds for Democratic-led states while readying a plan to lay off potentially droves of civil servants imminently," according to The New York Times.
Those firings may begin this week, according to Politico: "OMB [Office of Management and Budget] chief Russ Vought told House Republicans on a private call Wednesday that the administration will start mass reduction-in-force moves, or firings, of federal workers 'in a day or two,' according to four people granted anonymity to describe the call."
That Politico report was dated Oct. 1, so the first firings could begin today or tomorrow. Indeed, "at least one agency — the U.S. Patent and Trademark Office — ...on Wednesday issued layoff notices," reports the Federal News Network.
So, if this shutdown drags on and the government uses it to eliminate funding for some infrastructure projects, while firing a lot of federal employees, there could be greater and more lasting damage done to the economy than normal.
Effects of Previous Shutdowns
What's normal? The Wall Street Journal cites experts who reckon each week of shutdown reduces gross domestic product (GDP) by between 0.15% (Goldman Sachs) and 0.2% (Deutsche Bank).
"The 34-day partial government shutdown in 2018 and 2019 reduced annualized real gross domestic product growth by 0.4 percentage point in the first quarter of 2019, the Congressional Budget Office estimated," says the Journal. "A full shutdown could more closely mirror the effects of the 16-day 2013 funding lapse, which lowered annualized growth by as much as 0.6 percentage point, the OMB reported."
But the Journal's report argues that lost growth is quickly recovered when federal employees, whose wages are currently frozen, get their back pay.
Caveat
Not everyone agrees that mortgage rates will likely fall for the duration of the shutdown. Realtor.com cites Danielle Hale, its chief economist: "Hale predicts that mortgage rates will remain steady or rise slightly during the shutdown, and then resume easing once the disruption resolves and federal economic data resumes."
U.S. News quotes one of Hale's colleagues in Realtor.com's economics team, Anthony Smith. He pointed to two exceptions to the lower-mortgage-rates-during-shutdowns rule of thumb. Well, technically, he provided one exception and one possible explanation.
During the 2018-19, 34-day shutdown, mortgage rates fell to 4.45% from 4.62%. But Smith sees that as explained by the then-existing declining trend in mortgage rates.
The 16-day 2013 shutdown was the only true exception Smith cited. Mortgage rates rose during that period to 4.28% from 4.22%. They only resumed their previous downward trend when the lockdown ended.
We lean toward the more widely expressed view among economists that mortgage rates are more likely to fall than rise during this shutdown, assuming they move much at all. But then again, anything could happen.
