California's economy could suffer if the government shutdown drags into February

Key Points
  • California has more federal workers than any other state, but so far, economists say, the Golden State has only suffered a relatively minor economic impact from the partial government shutdown.
  • But experts suggest that could change if the impasse drags into February – at a time when the state's agriculture sector is already reeling from President Donald Trump's trade war with China.
  • "Major purchases, such as homes, are likely already seeing an impact as pay anxiety offsets the positive effect of lower mortgage rates," says one economist.
Construction vehicles block the entrance to Harmony Borax Works, a Death Valley National Park historical site, which is closed during the partial U.S. government shutdown, in Death Valley, California, January 10, 2019.
Jane Ross | Reuters

LOS ANGELES — California has more federal workers than any other state, but so far, economists say, the Golden State has only suffered a relatively minor economic impact from the partial government shutdown.

But experts suggest that could change if the impasse drags into February – at a time when the state's agriculture sector is already reeling from President Donald Trump's trade war with China.

Nearly 245,000 federal workers are located in California, according to November estimates provided last week by the state's Employment Development Department. That's more than other other single state, including Texas (200,000) and Virginia (178,000), according figures published by Governing magazine.

About 800,000 total federal workers are either furloughed or working without pay during the shutdown, which started days before Christmas after Trump refused to sign any spending bills that don't include more than $5 billion in funding for his proposed southern border wall. Democrats have likewise rejected any proposal to fund the wall. Critics argue that such a barrier would be inefficient and ineffective in solving problems with illegal border crossings, which have declined in recent years.

To be clear, not all workers in California are furloughed, but many are working without pay and struggling to pay rent, mortgages and other bills.

"My personal finances are being impacted by stuff that's completely out of my control, and I don't think it's okay for any of them [in Washington] to be doing this to me or my fellow coworkers," said Destinee Cooper, a furloughed project officer with the Environmental Protection Agency in the San Francisco Bay Area. "It makes me feel like I'm one of those chess pieces that they're just moving around the chess board."

Cooper said she is not taking sides on the shutdown and described herself as "not political." That said, she called the situation "extraordinarily stressful."

The Trump administration's Office of Management and Budget reportedly is preparing for the shutdown to continue into February, the Wall Street Journal reported last Friday. There also were reports last week the president could pull billions of dollars in flood prevention funds from California, as well as reconstruction money from hurricane-damaged Puerto Rico, to help pay for the border wall.

Where California could feel the pain

The state economy could start to feel pronounced pain from the shutdown if it drags into February, economists say.

"Anecdotally, the biggest impact could be on contractors to various government agencies (e.g., air traffic controllers), who are not working and will not receive back pay," said Lynn Reaser, chief economist for the Fermanian Business and Economic Institute at Point Loma Nazarene University in San Diego. "Also, lower or middle income government employees living paycheck to paycheck are having difficulty paying Christmas bills and paying for current expenses."

If the shutdown extends beyond this month, "government employees who are better [off] or with savings cushions will be significantly affected," according to Reaser, a former chief economist at Bank of America. "Major purchases, such as homes, are likely already seeing an impact as pay anxiety offsets the positive effect of lower mortgage rates."

On Sunday, California's new governor, Democrat Gavin Newsom, tweeted: "This shutdown isn't only disrupting the lives of hundreds of thousands of federal workers — it's also sowing chaos and uncertainty into our economy. This cannot be allowed to continue."


As a result of the shutdown, S&P Global Economics estimated last Friday that the U.S. economy already has lost $3.6 billion. It also predicted that it will only take two more weeks to cost the entire national economy more than $6 billion, or in excess of the $5.7 billion that Trump is asking for to build the southern border wall.

"If we go another month, then I start feeling like we're diving into the realm where people are going to start being hurt," said Christopher Thornberg, founding partner of research and consulting firm Beacon Economics in Los Angeles. He said there's a chance the shutdown could end up costing "a heck of a lot more in the long run than those $6 billion that they're fighting over right now."

Thornberg also expressed concern that the shutdown is causing damage to national parks. For example, there have been reports of waste piling up and vandalism at parks in California, including Joshua Tree National Park located about 130 miles east of Los Angeles.

Steve Tadelis, an economist at the University of California-Berkeley's Haas School of Business, said the state's diverse economy will help it weather the shutdown. Yet he said there's a possibility towns where a large percentage of federal workers are located could start to feel the pinch from the shutdown.

"This is what makes it 'easy' to continue [the shutdown since] the average person is not being impacted by this," Tadelis said. "Unless you have to get something from the federal government, your day-to-day life is just not impacted. If tomorrow all the air traffic controllers or TSA folks walked off the job and airports were all shut down for two days, then I think people would feel very differently."

The Berkeley economist estimates fewer than one of every 100 Californians are furloughed.

Trying to make ends meet

But that's little consolation to those workers hit by the shutdown. Cooper, the furloughed EPA employee, said she applied for unemployment insurance but it still won't be sufficient to make ends meet.

"Even if I don't pay any of my other bills and don't do anything else but try to pay for the rent, my unemployment for the month of January still won't cover my rent," Cooper said. She even postponed doctor's appointments and canceled a trip and cut back on eating out to help save enough money to pay the electricity bill.

According to California's EDD, there were a total of 779 federal workers in the state that filed for unemployment benefits in the week ending Dec. 29, the first week of the shutdown. It said unemployment benefit amounts range from $40 to $450 per week, depending on the employee's earnings.

At the same time, some federal workers subject to furlough are finding it difficult to get other jobs because of the government's ethics laws and restrictions on conflicts of interests still apply to federal workers during the shutdown. Some also say private employers have been hesitant to hire federal workers because they expect people to return to government jobs when the shutdown ends.

"It's mind boggling because I can't just go out and get a job that my agency has trained me for because there are so many rules around the fact that I can't create a conflict of interest for myself when I go back," said Cooper, whose job includes managing federal funds such as EPA grants.

Overall, about 800,000 federal workers are affected by the partial shutdown of the government, with about 420,000 working without pay, according to an estimate last month from the Senate Appropriations Committee. That includes about 53,000 TSA employees, nearly 45,000 staff at national parks or forests as well as nearly 17,000 correctional officers at federal prisons and thousands of specialists involved in weather forecasting and food inspection.

The shutdown comes as the government is coping with a third case of the virulent Newcastle disease in a commercial poultry flock in California. Ed Curlett, a spokesman for the U.S. Department of Agriculture's Animal and Plant Health Inspection Service, said in an email that the agency has "called in employees as needed" to handle the outbreak and continues to work with the state's agriculture agency to respond to the ongoing outbreak.

Trade war double whammy

Also, given the shutdown the USDA last week extended deadline for farmers to sign up for the Trump administration's $12 billion emergency aid market facilitation program for agricultural producers hurt by retaliatory tariffs from China and others. The deadline had been Jan. 15 but was extended for each business day the department's Farm Service Agency offices are closed.

The trade war has contributed to sharp drops in agricultural exports of key products from California, according to data from Wisertrade.org, a trade analysis firm. In the year-to-date period through October, which is the most recent month available, California fruit exports were down more than one third in dollar terms from a year ago and dairy about 13 percent.

China and other countries have slapped tariffs on a variety of U.S. agriculture commodities. A study last year by the University of California Agriculture and Natural Resources' Agricultural Issues Center estimated that trade tariffs on nearly a dozen different varieties of fruit and tree nuts would cost more than $3 billion annually.

During October, California experienced an 11 percent decline in exports subject to trade retaliation, according to Tariffs Hurt the Heartland, a free trade group.

Trump spoke to the American Farm Bureau Federation annual convention in New Orleans on Monday, blaming Democrats for the shutdown. But he also defended his administration's tough policies on trade, which led Beijing to impose punishing tariffs on a variety of American farm products, including soybeans and pork.

"We're turning all of that around with fair trade deals that put American farmers, ranchers, and, in fact, America first," Trump said.