The Longer It Lasts, the More a Shutdown Could Hurt the Economy

A room for Senate appropriations remained empty on Saturday during the shutdown.

The early days of the federal government shutdown won’t slow the American economy much. No workers are missing paychecks yet, and because it is a weekend, few businesses expect to feel the effects of lost customers or suppliers.

That could change, quickly, if the impasse drags out. The longer the government is shut down, the bigger the economic impact — and this time, the bigger the chances that the economy’s recent growth spurt could stall, at least temporarily.

Shutdowns bring the government to a partial stop, though so-called essential personnel keep working, and many services continue to be provided.

That partial stop costs the economy productive work time, historical evidence suggests, along with revenue that the federal government collects from daily fees at parks and museums. Private-sector companies that contract with the government have their work temporarily disrupted, and travel spending is reduced, affecting local economies.

When the government is late in paying contractors, it incurs additional interest costs. Delays in issuing federal checks, permits and licenses slow the rest of the economy’s workings, affecting export and import permits, mortgages and small-business loans. A government funding crisis also casts a pall on the economy, damaging consumer sentiment and business optimism.

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What Happens When the Government Shuts Down?

The federal government has shut down. But what does that mean and how does it happen?

“The motion is adopted. Without objection, the motion to reconsider is laid on the table.” Here we are again. Partisan political bickering has led to another government shutdown. But what does that mean? The federal fiscal year starts on Oct. 1, often without new spending laws in place. Instead, the president and Congress strike a short-term deal to buy more time. If they can’t reach a new agreement before the next deadline, much of the federal government shuts down. Since October, there have already been three short-term agreements. When the government shuts down, federal workers are either forced off the job or told to work without pay. Essential services, such as airport security and food inspections, stay in place. The military remains active but may not be paid on time, depending on how long the shutdown drags on. And national parks and monuments will remain open, at least this time. In the event of a shutdown, the I.R.S. will likely be forced to slow implementation of the new tax bill. Funding for Puerto Rico, still rebuilding from Hurricane Maria, also hangs in the balance. The future will remain unclear for DACA recipients. And without an extension, the Children’s Health Insurance Program will run out of money.

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The federal government has shut down. But what does that mean and how does it happen?CreditCredit...Mark Wilson/Getty Images

A shutdown could also prevent federal agencies from releasing economic data that businesses and traders rely on to make market decisions every day.

Economic activity typically snaps back soon after a shutdown ends, but not before the partial stoppage damages growth.

A 16-day shutdown in October 2013, for example, may have cost $20 billion in output, cutting 0.5 percentage point off the annualized economic growth rate in the fourth quarter, according to the securities rating firm Moody’s. At that shutdown’s peak, 850,000 federal employees were furloughed for a total of 6.6 million workdays. Paying them for days not worked cost $2 billion.

Private-sector employment is also affected. The 2013 shutdown cut job creation in the sector by about 120,000 over two weeks, the Council of Economic Advisers estimated in an analysis conducted immediately afterward. “A range of indicators show that sentiment, job creation, consumption, and some elements of production grew more slowly in the first half of October than in previous months,” the report concluded.

As a whole, shutdowns cost the economy at least 0.1 percentage point of growth per week, and probably much more, the Congressional Research Service surmised in a report in 2014. A separate report from the Bureau of Economic Analysis, part of a larger analysis by the Congressional Research Service, found that lost hours worked by federal employees over the two weeks of the shutdown in 2013 accounted for a 0.3 percentage point drop in quarterly growth — by themselves.

President Trump’s Council of Economic Advisers estimates that every week of furloughing federal workers would reduce annual economic growth by 0.2 percentage point.

Another shutdown would trim at least $6.5 billion a week from the nation’s economic output, economists at Standard & Poor’s suggested. “A shutdown affects not only Washington and its employees, but also has ripple effects across sectors throughout the country — from shopping malls to national parks, from contractors to hotels,” said Beth Ann Bovino, chief United States economist at S.&P.

Job recruiters worried that a shutdown could also slow hiring. “We face a very real risk of a national hiring hesitation, with recruiters putting plans on hold, and job movers opting to sit tight for the foreseeable future,” said Doug Monro, a founder of the global job search engine Adzuna.

And then there are the consequences for Wall Street. The nearly monthlong shutdown in 1995-96 coincided with a 5 percent drop in stock prices. “Certainly the stock market has been on a tear and proved quite resilient,” said Nancy Vanden Houten, a senior economist at Oxford Economics.

“I don’t think a brief shutdown would bother the markets all that much,” she said. “But the longer it lasts, the more likely it is to affect financial markets.”

After recent gains, stocks “might be a little more vulnerable to a sell-off,” she added.

So far, markets have not reacted adversely. United States stock futures were trading upward on Saturday afternoon, well after the shutdown began. But analysts warned last week that traders could be spooked if they grow to believe a shutdown bodes poorly for raising the federal debt limit this spring, in time to prevent a government default on debt.

“While a government shutdown only risks delayed payments for discretionary spending categories,” analysts at Morgan Stanley wrote, “a Treasury default driven by the debt ceiling could be catastrophic for the U.S. Treasury market and other macro markets in general.”

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