Government shutdown

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Gregory Daco

19 Sep 2023

What are the risks from a government shutdown?

  • There is a pressing obligation for Congress to pass legislation to fund the government in fiscal year 2024 and avoid a government shutdown before the September 30 deadline, but the window is rapidly closing. Such a shutdown could leave a visible mark on the economy.

  • We estimate that each week of government shutdown will cost the US economy $6 billion, and shave GDP growth by 0.1 percentage point in Q4 (in annualized growth terms). The drag on growth reflects the reduction in pay for furloughed federal workers, delays in government spending on goods and services, and the resulting decrease in final demand. Importantly, the economic impact of any shutdown within a quarter would be partially offset by retroactive pay for furloughed workers and the resumption of economic activity. 

  • Apart from the direct macroeconomic consequences of a shutdown, financial markets and private sector confidence could also be affected. Additionally, it would lead to a delay in economic data releases at a crucial time for the economy, creating a potential headache for economists and policymakers trying to assess the economy’s health.

What could a federal government shutdown look like?

A government shutdown would halt most government agency activities and services and require all non-essential government personnel to take unpaid leave (known as furloughing). Employees of private firms that contract with the federal government may also be subject to layoffs.

Importantly, essential personnel (air traffic controllers, food safety inspectors, the armed forces, etc.) would not be affected by the shutdown. Similarly, the U.S. Postal Service would not be affected as it has separate funding. The Fed is also funded outside the congressional appropriations process and would not be affected. Treasury auctions are not affected by a government shutdown.

When was the last major government shutdown?

The last government shutdown was also the longest on record. It lasted 35 days between December 2018 and January 2019 with about 375,000 federal government employees furloughed and another 425,000 workers were required to work without pay.

Could this have an impact on the US economy?

The economic impact of any government shutdown depends on its duration and scope as some shutdowns have been partial with some departments being funded. A very brief shutdown would have a negligible impact on the economy.

Excluding the U.S. Postal Service, there are about 2.3 million federal employees, of which roughly 800,000 are non-emergency federal workers. Based on an average annual salary of $95,000 per federal worker, the annual compensation bill for federal workers is $76 billion. This translates into a weekly bill of $1.5 billion — assuming all workers remain on furlough. On an annualized basis, a one-week furlough would cut $6 billion, or 0.1% off real GDP growth in Q4 (even though furloughed workers have always been paid retroactively).

Apart from the direct macroeconomic consequences of a shutdown, financial markets and private sector confidence could also be affected. The 35-day government shutdown in early 2019 led to rising policy uncertainty and sharp decline in private sector confidence with the University of Michigan Consumer Sentiment Index posting its most significant decline since 2012.

How could a shutdown affect economists, investors and policymakers?

A government shutdown would lead to a delay in economic data releases as agencies would suspend data collection, processing and dissemination. In December 2018 and January 2019, the 35-day government shutdown led to a data drought with the postponement of over 10 key economic data releases including trade, housing and consumer spending data.

Given the current state of the economy and numerous uncertainties on the horizon, the absence of data could carry a significant cost for private sector economists, investors and Fed policymakers who would fly partially blind as they assess the US economy’s performance.

While private sector data could help fill some of the blind spots, the delays in official data reports would constrain Fed policymakers as they fine-tune monetary policy.

The views expressed by the author are his own and not necessarily those of Ernst & Young LLP or other members of the global EY organization.

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