Looming government shutdown

Economic stability at risk amid approaching government funding deadline

• There is a growing urgency for Congress to pass legislation to fund the government before current appropriations expire at midnight on September 30. Failure to do so would trigger a government shutdown, leaving a visible mark on the economy.
  
  
• We estimate that each week of shutdown would reduce US GDP growth by 0.1 percentage points (ppt) in Q4 (in annualized terms), translating into a $7 billion weekly hit to the economy. This drag reflects reduced pay for furloughed federal workers, delayed government procurement of goods and services, and the resulting decline in final demand. However, part of the economic cost would be mitigated by retroactive pay for furloughed employees and the rebound in activity once the government reopens.
  
  
• Beyond the immediate macroeconomic consequences, a shutdown would also weigh on financial markets and private sector confidence. Perhaps most critically, it would delay the release of key economic data at a pivotal juncture for the economy — complicating the task of Fed policymakers, investors and business leaders who are navigating a highly uncertain, data-dependent environment.

What could a federal government shutdown look like?

A government shutdown would suspend most federal agency operations and services, requiring all non-essential personnel to take unpaid leave — a process known as “furloughing.” Employees of private firms contracting with the federal government may also face furloughs or layoffs.

Crucially, essential services would continue. Air traffic controllers, food safety inspectors and military personnel, among others, would remain on duty. The US Postal Service (USPS), which operates with independent funding, would not be affected. Similarly, the Federal Reserve — funded outside the Congressional appropriations process — would continue operations uninterrupted, as would Treasury auctions.

When was the last major government shutdown?

The most recent — and longest — government shutdown occurred between December 2018 and January 2019, lasting 35 days. Approximately 375,000 federal employees were furloughed, while another 425,000 were required to work without pay.

Could this have an impact on the US economy?

The economic impact of a shutdown depends largely on its duration and scope. Some have been partial, with certain departments continuing to receive funding. A brief shutdown would likely have a negligible effect on overall growth.

Excluding the USPS, the federal government employs around 2.3 million people, of which approximately 800,000 are non-essential workers. At an average annual salary of $106,000, total federal compensation reaches about $85 billion annually — or $1.7 billion weekly. If all non-essential workers are furloughed, a one-week shutdown could reduce Q4 real GDP growth by roughly $7 billion — or 0.1% on an annualized basis — even though back pay has historically been granted post-shutdown.

Beyond the direct macroeconomic effects, shutdowns also dent private sector confidence. The 2019 shutdown sparked a spike in policy uncertainty and led to the sharpest monthly drop in the University of Michigan Consumer Sentiment Index since 2012.

How could a shutdown affect economists, investors and policymakers?

A shutdown would interrupt the flow of federal economic data by halting the collection, processing and dissemination of key indicators. During the 2018–2019 shutdown, more than 10 vital data releases — including trade, housing and consumer spending figures — were delayed, creating a “data drought” that left markets and policymakers operating in the dark.

In today’s environment of elevated uncertainty, such data gaps could carry significant consequences. Private sector economists, investors and Fed policymakers would be forced to assess the economy’s trajectory with limited visibility. While private data sources might fill some gaps, the absence of official releases would constrain the Fed’s ability to conduct evidence-based policy — especially as it navigates a data-dependent, cautious recalibration of monetary policy.