US Shutdown Almost Over, But Economic Effects Will Linger
The longest federal government shutdown in US history seems to be approaching its conclusion, yet it has undoubtedly impacted an economy that was already facing challenges. Approximately 1.25 million federal employees have not received their pay since October 1. Thousands of flights have been cancelled, and this trend is anticipated to persist throughout the week, even as Congress progresses toward reopening the government. There has been a noticeable deceleration in government contract awards, and certain food aid recipients are experiencing interruptions in their benefits. Much of the lost economic activity is expected to be regained upon the government’s reopening, as federal workers will receive back pay. However, certain cancelled flights will not be rescheduled, missed dining experiences will not be compensated, and some delayed purchases may ultimately not occur. “Short-lived shutdowns are usually invisible in the data, but this one will leave a lasting mark,” said Gregory Daco, “both because of its record length and the growing disruptions to welfare programs and travel.”
The Congressional Budget Office projected that a six-week shutdown will decrease growth in this year’s fourth quarter by approximately 1.5 percentage points. That would reduce growth by fifty percent compared to the third quarter. It is projected that the reopening should enhance first-quarter growth next year by 2.2 percentage points; however, approximately $11 billion in economic activity will be permanently lost. The previous longest government shutdown, occurring between 2018 and 2019, extended for 35 days; however, it only partially affected the government, as numerous agencies had already received full funding. It is stated at that time that it only impacted the economy by approximately 0.02 percent of GDP. The ongoing shutdown is exacerbating the economy’s pre-existing difficulties, which encompass slow hiring, persistently high inflation, and President Donald Trump’s tariffs, generating uncertainty for numerous businesses. Nevertheless, a limited number of economists anticipate a recession. Approximately 650,000 federal employees were not on duty during the shutdown, which is expected to increase the unemployment rate by roughly 0.4 percentage points in October, raising it to 4.7 percent from 4.3 percent in August, the date of the last report. Once the government reopens, all those workers would be counted as employed.
The reports estimates that, in total, federal workers will have missed approximately $16 billion in wages by mid-November. This has resulted in decreased expenditures at retail outlets, dining establishments, and presumably a decline in holiday travel. It is likely that large purchases will be delayed, which may lead to a deceleration in the overall economy. During the shutdown, Trump had threatened not to provide back pay; however, the agreement reached in Congress will ensure that those lost wages are compensated once the government reopens. The shutdown has exacerbated the economic challenges facing the Washington, DC area, where the unemployment rate stood at 6 percent prior to the shutdown, following job losses attributed to Trump’s cuts to the federal workforce earlier this spring. In the Washington, DC area, which encompasses the adjacent suburbs in Virginia and Maryland, there exists a notable concentration of federal workers; however, the majority reside and are employed outside of the nation’s capital. According to the sources, federal workers constitute approximately 5.5 percent of Maryland’s workforce. However, they account for 2.9 percent of the workforce in New Mexico, 2.6 percent in Oklahoma, and 3.8 percent in Alaska. Then there are the federal contractors. Bernard Yaros, an economist, estimates they could total as many as 5.2 million, and they are not guaranteed back pay once the shutdown ends.
Airlines cancelled over 2,000 flights by Monday evening, adding to the 5,500 cancellations since Friday. This action comes on the orders of the Federal Aviation Administration, which aims to alleviate the strain on air traffic controllers, who have now gone without two paychecks. Prior to the flight cancellations, Tourism Economics, an economic consulting firm, projected that the shutdown would lead to a daily reduction in travel spending of $63 million, indicating that a six-week standoff could result in a $2.6 billion loss for the travel industry. The cancellation of flights results in diminished business for hotels, restaurants, and taxi drivers. Federal employees have already canceled upcoming trips, as reported by Tourism Economics, which may not be rescheduled even when the government reopens. The shutdown has deteriorated Americans’ perspective on the overall economy. Declining consumer sentiment can, over time, reduce spending and slow growth. However, in recent years, Americans have continued to shop even when their outlooks turned grim. Consumer sentiment has fallen to a three-year low, nearing the lowest level ever documented in a survey by the University of Michigan, as reported on Friday. This decline is driven by growing pessimism regarding personal finances and expected business conditions among Americans. The November survey revealed that the index of consumer sentiment stands at 50.4, reflecting a significant decline of 6.2 percent from the previous month and a staggering drop of nearly 30 percent compared to a year earlier.
Although the shutdown has not entirely halted federal government spending, it has led to a decrease in equipment purchases and has stopped the issuance of new contracts. Yaros estimates that approximately $800 million in new contracts faced the risk of not being awarded each day during the shutdown. The flow of federal awards has nearly ceased at the Department of Defence, NASA, and the Department of Homeland Security, Yaros stated. The shutdown postponed the distribution of $8 billion in monthly SNAP food assistance to 42 million recipients in November, resulting in a considerable financial upheaval for numerous households that likely curtailed their spending. Several states have successfully disbursed full benefits for this month, while the Trump administration continues to contest the matter in court. The proposal being evaluated in Congress to restore government operations encompasses complete financing for SNAP benefits. The government shutdown halted the release of crucial economic data regarding unemployment, inflation, and retail spending, which the Federal Reserve relies on to assess the health of the economy. Even with the government’s reopening, certain data will continue to experience delays. The Fed may refrain from implementing a third interest rate cut at its December meeting, a move that had been broadly anticipated prior to the shutdown.
“What actions should you take if you find yourself driving in foggy conditions? You slow down,” said Fed Chair Jerome Powell. Powell stated that the Fed’s interest-rate setting committee is significantly split on the decision to lower its key rate, in part due to the current uncertainty surrounding the economy’s health. The government has failed to release two monthly jobs reports, and the inflation data for October, set to be published on Thursday, is unlikely to be made available. Powell stated that a rate cut in December was not a foregone conclusion and noted that the lack of data could influence the Fed’s decision to forgo a rate cut at its upcoming meeting on December 9-10. Fewer rate cuts may deter borrowing and spending, potentially impacting the economy in the months ahead.
