The ongoing U.S. government shutdown, which commenced on October 1, has now become the longest and most damaging in American history. This unprecedented 36-day lapse in funding is having immediate negative effects on the economy, with implications that may last much longer.
Significant Economic Impact
During this shutdown, an estimated 1.4 million federal employees are not receiving paychecks, although many continue to work. Moreover, millions of Americans are missing critical food stamp benefits. Economic activities have slowed as key government data releases have halted.
- Approximately 1.4 million federal employees working without pay
- Millions not receiving vital food stamp benefits
- Significant economic data releases paused
Alec Phillips, chief political economist at Goldman Sachs, noted that this shutdown is likely to exert the greatest economic impact ever recorded. He indicated that if the shutdown concludes soon, it could still lower the growth of the real Gross Domestic Product (GDP) by 1.15 percentage points for Q4.
Projected GDP Losses
The nonpartisan Congressional Budget Office (CBO) estimates that the shutdown will reduce GDP by one to two percentage points. Although much of the decline is expected to recover post-shutdown, the CBO projects permanent losses between $7 billion and $14 billion.
Goldman Sachs has revised its GDP growth forecast for the fourth quarter to just 1%, a stark contrast to previous estimates of 3% or even 4% growth. The 2018-2019 shutdown, which lasted 35 days, was much less damaging because it affected only 10% of government spending. The current shutdown, however, has halted all appropriations, causing broader implications for the economy.
Challenges Ahead
The situation is complicated by an ongoing economic slowdown. High tariffs, reduced immigration, and the resumption of student loan payments are contributing to this downturn. David Kelly, chief global strategist at JPMorgan Asset Management, emphasized the troubling impact of political maneuvering on public welfare.
Measuring the precise damages is challenging due to the information vacuum caused by the shutdown. Only one significant economic report, the September Consumer Price Index (CPI), has been released during this period. Key reports, such as the monthly jobs statistics and inflation metrics, remain sidelined.
Federal Reserve Decisions
Policymakers have faced significant constraints. For the first time, the Federal Reserve decided on interest rates without essential economic data from the Bureau of Labor Statistics. Fed Chair Jerome Powell indicated that decision-making could slow down without visibility on economic trends.
Once the government reopens, data quality may suffer due to uncollected surveys during the shutdown. The unemployment rate may also see a spike, as furloughed workers typically count toward the unemployment figures.
Future Recovery Prospects
Despite the immediate damages, experts forecast a potential recovery. Goldman Sachs anticipates that the economic effects of the shutdown might reverse quickly, boosting GDP growth in the first quarter to 3.1% as furloughed workers return. However, a key aspect of recovery is the repayment of furloughed workers, a point of uncertainty highlighted by President Trump’s hesitance to commit to back pay.
In summary, while the current government shutdown is unprecedented in both duration and impact, the long-term effects on the economy hinge on timely government action and policies regarding worker compensation. As events continue to unfold, the economic landscape hangs in the balance, pending resolution.
