The latest edition of the fiscal follies in Washington has resulted in the 21st government shutdown since 1976 and the first since 2018, when the shutdown lasted 35 days and was the longest in that time.
The major risk to the economy would be an extended shutdown, which would raise the unemployment rate, reduce household consumption and restrain economic growth.
In terms of data, the week of Oct. 12 through Oct. 18 is the reference week for the Bureau of Labor Statistics’ household employment survey. If the shutdown lasts that long, furloughed workers would be counted as unemployed, which would send the unemployment rate higher, toward 4.5% to 4.7%.
No two government shutdowns are alike. Each has its own context, and this one clearly is not about fiscal sustainability, pushing interest rates lower or bolstering economic growth.
Since both parties are tending to their own domestic political interests, the risk of another extended shutdown is elevated.
Should the shutdown last only a few days and government workers be compensated for furloughs, the economic impact will be temporary and muted.
Under such conditions, we estimate that a shutdown will subtract a tenth of a percentage point from GDP for each week that it is allowed to occur.
The logic is straightforward: The longer the shutdown, the greater the hit to household consumption, fixed business investment and economic activity.
It is important to note that in past shutdowns it is not always the tangible impact that can be quantified.
Rather it’s the intangible costs that appear over time—those caused by, for example, telehealth appointments and home health care visits covered under Medicare that will not take place during a shutdown.
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Decisions made by the federal government on which workers are furloughed, which ones are considered essential and who may be fired will largely affect the depth of the hit to domestic consumption.
We estimate that roughly 600,000 to 700,000 government workers will be affected by the shutdown.
Because the federal government has not passed any spending bills, we think that figure will tend toward the upper band of the estimate. This does not include the risk of mass firings by the administration, which has been part of the noise around the pre-shutdown negotiations.
Should such dismissals occur, then we would double our initial estimate of a modest drag on GDP in the fourth quarter with risk of a greater drag through the corporate investment channel.
Whatever the case, a shutdown results in lost pay and productivity of government workers as well as their unrecoverable spending that has an inverse multiplier effect on the revenue of local businesses.
There are also indirect effects on households and businesses that can have longer-term effects on the economy’s potential.
For example, we can expect a shutdown lasting more than a few days to sap corporate confidence, which results in reduced capital investments over the next couple of months.
Because investors have been conditioned to the political theater around such brinksmanship, these shutdowns simply no longer hurt equity markets or move broader financial markets.
Perhaps the greater long-term risk from another shutdown is that it can lead to increased uncertainty over the reliability of government financial obligations, which translates into potential downgrades to the U.S. credit ratings and higher risk premia required by investors.
Lastly, the government shutdown will result in the U.S. September jobs report—scheduled to be released on Friday—being postponed.
If the shutdown lasts more than 7 to 10 days, it is likely that the Oct. 15 release of the September consumer price index will also need to be delayed.
And that only would add to the degree of difficulty around the Federal Reserve’s next meeting on Oct. 28-29, when roughly 90% of investors are anticipating that the central bank will reduce its policy rate by 25 basis points to a range between 3.75% to 4%.
