Government Shutdown: Understanding the Economic Impact
The longest federal government shutdown in U.S. history is nearing its end, but its effects on the economy will be felt for a while. With approximately 1.25 million federal workers unpaid since October 1, the shutdown has caused significant disruptions to various sectors, including travel, food aid, and government contracts. According to Gregory Daco, chief economist at EY, “Short-lived shutdowns are usually invisible in the data, but this one will leave a lasting mark, both because of its record length and the growing disruptions to welfare programs and travel.”
Economic Consequences
The Congressional Budget Office estimates that a six-week shutdown will reduce growth in the fourth quarter by about 1.5 percentage points, cutting growth by half from the third quarter. Although the reopening of the government is expected to boost first-quarter growth next year by 2.2 percentage points, about $11 billion in economic activity will be permanently lost. The previous longest government shutdown, in 2018-2019, lasted 35 days and only partially shut the government, resulting in a minimal impact of about 0.02% of GDP.
Impact on Federal Workers and Contractors
Federal workers will have missed approximately $16 billion in wages by mid-November, leading to reduced spending at stores, restaurants, and likely decreased holiday travel. Large purchases will probably be postponed, slowing the broader economy. The shutdown has also affected federal contractors, with estimates suggesting that up to 5.2 million contractors may be impacted, and they are not guaranteed back pay once the shutdown ends.
Flight Disruptions and Consumer Sentiment
Airlines have canceled over 2,000 flights, and the shutdown has reduced travel spending by $63 million a day, according to Tourism Economics. The canceled flights have also affected hotels, restaurants, and taxi drivers, resulting in significant losses for the travel industry. Additionally, consumer sentiment has worsened, with the University of Michigan’s survey showing a three-year low, which can reduce spending and slow growth over time.
Federal Spending and SNAP Benefits
The shutdown has reduced federal government spending, with an estimated $800 million in new contracts at risk of not being awarded each day. The shutdown also delayed the payment of $8 billion in monthly SNAP food aid to 42 million recipients, creating a significant financial disruption for many households. The deal to reopen the government includes full funding of SNAP benefits.
Interest Rate Cuts and Economic Data
The government shutdown has cut off the flow of economic data, making it challenging for the Federal Reserve to monitor the economy’s health. As a result, the Fed may not deliver a third interest rate cut at its December meeting, which was widely expected before the shutdown. Fed Chair Jerome Powell stated that the lack of data could contribute to a decision to skip a rate cut, which could discourage borrowing and spending, weighing on the economy in the coming months.
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