US government shutdown hits US economy

US government shutdown triggers economic uncertainty and data blackout

• A federal government shutdown began after Congress failed to pass legislation before FY25 appropriations expired at 11:59 p.m. September 30. The shutdown will leave a visible mark on the economy.

• We estimate that each week of the shutdown will reduce US GDP growth by 0.1 percentage point (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 will be mitigated by retroactive pay for furloughed employees and a rebound in activity once the government reopens.

• Beyond the immediate macroeconomic consequences, the shutdown is also weighing on financial markets and private sector confidence. Perhaps most critically, it has already delayed the release of key economic data at a pivotal juncture for the economy — complicating the task of Fed policymakers and investors and business leaders navigating a highly uncertain data-dependent environment.

What does the US government shutdown mean for the economy?

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.

Crucially, essential services continue. Air traffic controllers, food safety inspectors and military personnel, among others, remain on duty. The U.S. Postal Service (USPS), which operates with independent funding, is not affected. Similarly, the Federal Reserve — funded outside the congressional appropriations process — continues operations uninterrupted, as do 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 government shutdown depends largely on its duration and scope. Some have been partial, with certain departments continuing to receive funding. A brief shutdown is likely to 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, the ongoing shutdown is likely denting private sector confidence. The 2019 shutdown triggered 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?

The shutdown is interrupting 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, these data gaps carry significant consequences. Private sector economists, investors and Fed policymakers are now forced to assess the economy’s trajectory with limited visibility. While private data sources may help fill some gaps, the absence of official releases constrains the Fed’s ability to conduct evidence-based policy — especially as it cautiously recalibrates monetary policy in a data-dependent environment.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.