A extended federal shutdown would significantly damage the U.S. economy. It would be damaging to millions of Americans who rely on transportation and it would severely undermine consumer confidence. National Association of Realtors economists are concerned at the impending shutdown disaster. They’re sounding the alarm that if it drags on for months, the damage could be much more severe. As government workers are furloughed and critical services are cut, the economic future could change very quickly.
If Congress and the Administration aren’t able to agree soon, an estimated 750,000 furloughed workers will be left hanging in limbo. The more than half that would run out of savings while waiting for a solution would lead to a domino effect on the rest of the economy.
The impending loss of access to essential food assistance for millions of low-income Americans on November 1 further exacerbates the situation. Perhaps most ominously, economists say those things threaten to drain broader consumer power, a key pillar of economic expansion.
As EY chief economist Gregory Daco told us, the need for timely and accurate data is more urgent than ever. “The lack of data adds uncertainty to an already uncertain underlying economy,” he stated. A government shutdown will pause government-issued economic data, making it increasingly challenging to gauge the health of the economy accurately.
The U.S. economy grew at an average annualized rate of 1.6% through the first half of 2023. Concern is growing at the prospect of a lengthy shutdown. That suggests a hit to annualized GDP of as much as 2% in the current quarter, Daco warns. He underscored that a government shutdown would only add to their burdens. These new challenges may deal an additional blow to the already precarious underpinnings of the U.S. economy.
To get a better sense of the likely implications, we turned to Mark Zandi, chief economist at Moody’s Analytics. Each week of a shutdown would reduce annualized real GDP growth by more than 0.1%, or about $30 billion. Zandi cautioned that if the impasse drags on into the holiday shopping season, it would represent a genuine threat of recession. He focused on the possible effect between Thanksgiving and Christmas.
Economists point to a hiring slowdown and persistent inflation as signs that the economy is not as robust as it once appeared. Inflation has certainly moderated from the highs experienced during the pandemic. Inflation has started to climb back up in recent months. This is near-historic withdrawal activity, which makes the short-term economic picture more complicated and increases the prospect of recession.
Jeffrey Campbell, an economics professor at Notre Dame University, told CBS News that while government shutdowns are annoying, they often have little real monetary effect. “Shutdowns involve extremely little money because most federal spending is on autopilot,” he explained. He admitted that sometimes even the small stuff adds up big, especially when they’re all compounded over time.
When a shutdown occurs, both policymakers and business leaders usually look to private sector data sources. The absence of readily available federal data is no small hindrance. It undermines the ability of short- and longer-term decision-makers to act proactively and confidently in what is already a very choppy environment.
“We’re gradually reaching a point where the shutdown becomes something more significant,” he warned.
