As the U.S. government shutdown enters its third week and government workers miss their first paychecks, both the public and policymakers should expect the impact on households and businesses to increase in a nonlinear fashion.
That’s when missed paychecks, dampened consumer and corporate confidence and a slower pace of business investment all increase.
For this reason, our initial estimate of a 0.1% drag on gross domestic product is now outdated, and we expect a 0.25% drag per week, or 1% per month.
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The nonlinear acceleration of the overall drag on economic activity is straightforward.
Merchants that rely on a steady stream of workday customers will experience a drop in revenues because of those missed paychecks.
That lost revenue will most likely never be recovered and in turn the same merchants that would like to hire workers then choose to hold off and consider what steps they need to take to reduce costs as revenues decline.
Almost always, they find the savings in labor costs, whether it be reduced hours or outright layoffs.
As a result, the risk of the unemployment rate rising toward the upper end of our original band of 4.5% to 4.7% looks likely.
In terms of the direct impact of the shutdown, the Congressional Budget Office estimated that the five-week shutdown that started in December 2018 delayed approximately $18 billion in federal discretionary spending for compensation and purchases of goods and services in addition to suspending some federal services.
That loss resulted in reduced economic activity of $3 billion in the fourth quarter of 2018 and $8 billion in the first quarter of 2019 (all in 2019 dollars), with all but $3 billion recoverable in subsequent quarters.
The CBO estimated a loss of GDP on the order of 0.1% in the fourth quarter of 2018 and 0.2% in the first quarter of 2019, with growth in subsequent quarters temporarily rising once the government reopened.
The current shutdown comes at a time of an already slowing labor market. Challenger, Gray and Christmas estimate that 946,000 workers have already been let go this year, with government workers comprising about 300,000 of them.
After the initial set of DOGE layoffs, government layoffs in September increased to 4,500 with more threatened should the shutdown continue.
