The Macroeconomic Effects of a Federal Government Shutdown

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This morning (September 30), the federal government appears headed for a shutdown at midnight. As this handy explainer by David Wessel on the Brookings Institution website notes:

“… federal agencies cannot spend or obligate any money without an appropriation (or other approval) from Congress. When Congress fails to enact the 12 annual appropriation bills, federal agencies must cease all non-essential functions until Congress acts.

Government employees who provide what are deemed essential services, such as air traffic control and law enforcement, continue to work, but don’t get paid until Congress takes action to end the shutdown. All this applies only to the roughly 25% of federal spending subject to annual appropriation by Congress.”

A federal government shutdown can cause significant inconvenience to people who rely on nonessential government services. Federal government employees won’t receive paychecks nor will contractors supplying nonessential services, such as cleaning federal office buildings. Many federal government facilities, such as museums and national parks will be closed or will operate on reduced hours. It seems likely that the Bureau of Labor Statistics will not release on time its “Employment Situation Report” for September, which was due on Friday.

Apart from the effects just listed, how might a shutdown affect the broader economy? The most recent federal government shutdown occurred during the first Trump administration and lasted from December 22, 2018 to January 25, 2019. At the end of that shutdown, the Congressional Budget Office (CBO) prepared a report on its economic effects. The main conclusion of the report was that:

“In CBO’s estimation, the shutdown dampened economic activity mainly because of the loss of furloughed federal workers’ contribution to GDP, the delay in federal spending on goods and services, and the reduction in aggregate demand (which thereby dampened private-sector activity).”

Table 1 from the CBO report shows the effect of the shutdown on federal government expenditures. (Note that the CBO refers to the shutdown as being “partial” because, as in all federal government shutdowns, essential government services continued to be provided.)

Table 2 from the report shows the effects of the shutdown on real GDP.

Most of the macroeconomic effects of a government shutdown aren’t long lasting because most federal government spending that doesn’t occur during the shutdown is postponed rather than eliminated. When federal government employees return to work after the shutdown, they typically receive backpay for the time they were furloughed. The CBO estimates that the lasting effect of the shutdown on GDP was small “about $3 billion in forgone economic activity will not be recovered. That amount equals 0.02 percent of projected annual GDP in 2019.”

Will a federal government shutdown that begins at midnight tonight and lasts for a few weeks also have only a short-lived effect on the economy? That seems likely, although the Trump administration has indicated that if a shutdown occurs, some federal government employees will be fired rather than just furloughed. A significant reduction in federal employment could lead to a larger decrease in GDP that might persist for longer. The effect on the areas of Virginia and Maryland where most federal government workers live could be significant in the short run.