Record shutdown leaves mark on the economy

US shutdown and data blackout hit households, businesses and policymakers

• A federal government shutdown — now the longest on record — began after Congress failed to pass appropriations before midnight on September 30. The prolonged shutdown is leaving a visible mark on the economy and weighing on confidence across households, businesses and markets.
  
  
• So far, the shutdown has shaved an estimated 0.8 percentage points off quarterly GDP growth — equivalent to roughly $55 billion in lost output. Each additional week costs about $7 billion (or 0.1 percentage points (ppt)) in GDP. If it extends for two months — with Supplemental Nutrition Assistance Program (SNAP) benefit disruptions and air-travel reductions — the cumulative drag could reach 1.8–2.0ppt, a material hit even after partial recovery once operations resume.
  
  
• Beyond the direct economic toll, the shutdown has suspended key federal data releases at a pivotal juncture for the economy — complicating decision-making for Fed policymakers, investors and business leaders in an increasingly data-dependent environment.

What does the US government shutdown mean for government activities?

A government shutdown suspends 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.

Critical services, however, continue. Air traffic control, food safety inspections, military operations and other essential functions remain active. The US Postal Service (USPS) operates as usual thanks to independent funding, while the Federal Reserve, Treasury auctions and the Securities and Exchange Commission (SEC) — which rely on non-appropriated or self-funded mechanisms — maintain operations, albeit with limited staffing for certain functions.

How does a government shutdown affect the deal market?

A shutdown typically slows the pace of dealmaking by disrupting key regulatory and approval processes. With limited staffing at the SEC, the Federal Trade Commission and the Department of Justice, reviews of mergers, acquisitions and initial public offerings often face delays. Capital market transactions may also be postponed until agencies resume full operations.

Beyond regulatory hurdles, uncertainty and gaps in government data weigh on valuations and due diligence. Many investors and corporate leaders could choose to defer strategic decisions — from capital raises to cross-border transactions — until reliable economic data and government functions are fully restored.

Is this the longest government shutdown on record?

Yes. The current shutdown is now the longest on record in US history, reflecting the deep political impasse and growing economic fallout.

The previous record was set between December 2018 and January 2019, when the government was shut down for 35 days, furloughing roughly 375,000 federal employees and requiring another 425,000 to work without pay.

Is the government shutdown an economic speed bump — or something more?

The shutdown has already shaved an estimated 0.8ppt off quarterly GDP growth — a visible drag that will deepen the longer it continues. 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.

Each week of closure costs the economy roughly $7 billion in lost output, or about 0.13ppt of annualized GDP growth. Excluding the USPS, the federal government employs about 2.3 million people, including 800,000 non-essential workers. At an average annual salary of roughly $106,000, total federal compensation amounts to $85 billion annually, or $1.7 billion per week — meaning each additional week of furloughs weighs directly on output and household income, even if back pay is later restored.

If the government reopens within the quarter, much of the lost activity will be recovered as spending and services resume. Still, around 20 percent of the cumulative drag will be permanent, reflecting activity that simply disappears — missed restaurant meals, canceled trips and deferred services that never occur. 

What additional economic impact could disruptions to welfare programs and air travel have?

The risks grow significantly if key programs and services are disrupted. There is widespread confusion surrounding SNAP payouts, which support more than 40 million Americans. Examining two plausible scenarios — a partial payout of roughly 65 percent for the month or a full suspension of benefits — the resulting drag on growth would range from 0.45–0.70ppt.

This would come on top of the existing shutdown effect, bringing the cumulative drag with SNAP discontinuations to roughly 1.3–1.5ppt on quarterly GDP if the shutdown extends for two months.

In addition, the US Travel Association estimates around $92 billion in domestic travel spending each month, with about 80 percent leisure and 20 percent business. A 10 percent reduction in flights, as ordered by the Federal Aviation Administration, would further dampen mobility and spending — adding an estimated 0.5ppt drag on quarterly growth.

Together, these welfare and travel disruptions could push the overall economic impact to 1.8–2.0ppt, marking a more durable hit to the economy.

How could the shutdown affect economists, investors and policymakers?

The shutdown has left economists, investors and policymakers flying blind. With the second consecutive employment report now missed, there is effectively no official read on the state of the labor market or broader economy. Key indicators on inflation, spending, housing and trade remain frozen, cutting off the flow of data that underpins evidence-based policymaking and market decisions.

Private-sector data helps fill some of the void, offering speed, frequency and sector-specific insights that official surveys often lack. Credit card transactions, private sector payrolls, job postings, confidence and housing data provide timely signals that are useful in a data blackout. Yet, as the Peterson Institute for International Economics notes, “the private sector can’t replace official statistics — but could be a great partner.”

Private sources capture only subsets of activity — cardholders, job seekers or online listings — and are subject to sampling bias and selection effects. Without official data for calibration, their reliability and comparability weaken over time. Official statistics, by contrast, are representative, transparent and methodologically consistent — the global gold standard for measuring economic performance.

Even once the shutdown ends, the data recovery will be slow and uneven. Some September figures may be released quickly, but some of the October data is likely lost forever as data collection didn’t occur, leaving permanent holes in time series. 

In today’s environment of heightened uncertainty, the loss of official data carries significant consequences. Economists, investors and Federal Reserve policymakers must now gauge the economy’s trajectory with limited visibility. 

How could the data blackout influence Federal Reserve policy?

The absence of official economic data severely limits the Fed’s ability to conduct evidence-based policymaking at a time when decisions are increasingly data-dependent and finely balanced. Without timely readings on inflation, employment and spending, the Fed risks misjudging the economy’s true momentum.

As Fed Chair Jerome Powell put it, “What do you do if you’re driving in the fog? You slow down.” The data disruptions caused by the shutdown could therefore argue for greater caution, with a growing number of policymakers signaling that the central bank should “at least wait a cycle” before cutting again.

Still, the limited private-sector data available so far offers a rather downbeat view on the labor market — showing lower job openings, a surge in announced job cuts, a modest rise in initial claims, limited growth private payrolls, job cuts from small and mid-sized businesses, and depressed labor market sentiment from consumers and business leaders. Taken together, these indicators suggest that labor market cooling is continuing gradually, consistent with our baseline expectation that the Fed will proceed with a rate cut in December, even as it moves cautiously amid the current data fog.