What Impact Would a Government Shutdown Have on the U.S. Economy?

With the U.S. Congress struggling to pass funding bills and appropriations set to lapse on Oct. 1, the federal government could be headed for a shutdown.

So far, Congress has not enacted any of the 12 appropriations bills that make up the discretionary spending budget. The Senate passed a continuing resolution on Tuesday that would temporarily fund the government until Nov. 19, but that legislation faces an uncertain fate in the House of Representatives. DBRS Morningstar does not foresee any immediate credit implications for the United States’ AAA rating. Still, a prolonged shutdown would intensify headwinds for the economy, as well as the chances of a recession.

A Shutdown Would Disrupt Federal Agencies That Rely on Discretionary Spending

Not all government spending would be affected by a shutdown. Congress passes annual appropriations acts to fund discretionary spending. In total, these account for 25%-30% of federal expenditure. Mandatory spending—such as Social Security, Medicare, or interest payments—is governed by other laws, and these areas would not be affected by a lapse in appropriations.

Moreover, not all funding gaps affect the entire discretionary budget. During some previous shutdowns, Congress passed one or more of the 12 appropriations bills, limiting the scope of those shutdowns to just the agencies whose funding had lapsed. In this case, however, Congress has not passed any of the 12 bills, suggesting this could be a full rather than a partial shutdown.

Economic Costs of a Shutdown Would Be Modest and Temporary

A shutdown would primarily affect the economy through three channels. First, there is a loss of output due to furloughed federal workers. During shutdowns, a majority of federal workers are deemed “excepted” and therefore continue to work and contribute to economic activity. However, the number of furloughed workers can still be meaningful from a macro perspective. During the full shutdown in 2013, about 850,000 workers were furloughed out of 2.1 million federal employees and an economywide labor force of 155 million. A similar dynamic could materialize if a full shutdown commences next week, with the lost output from furloughed workers likely having a relatively negligible but direct impact on GDP.

Second, a shutdown could adversely affect the economy through delayed payments to firms, contractors, and employees. Businesses may pull back on operations and workers may postpone purchases as they wait for the government to pay for their goods and services. However, these effects would likely be small and temporary. Any postponed spending would likely take place once the government reopens. In addition, federal workers are unlikely to significantly reduce consumption due to delayed salary payments, as they are entitled to back pay once the shutdown ends, regardless of whether they were furloughed.

Third, a shutdown could disrupt the delivery of government services to the private sector. This could include delays in permitting, licensing, and processing federal loans. It could also disrupt the tourism and transport sectors, as passport and visa applications go unprocessed and national parks, museums, and monuments potentially close to the public.

Cost of Shutdown Increases the Longer It Lasts

Overall, a shutdown would disrupt the economy, but the damage would likely be minimal. That said, the cost would increase the longer the shutdown lasts. There have been 20 government funding gaps since 1976, which was when the current budgetary framework was put in place. The average length of a shutdown has been eight days (although this includes funding gaps prior to 1981 that did not lead to a shutdown). The longest shutdown was in 2018-19 and lasted 35 days.

With the Republican Party holding a narrow majority in the House and the Democrats controlling the Senate, a bipartisan agreement is needed to keep the government open. Congress could act quickly to avoid a shutdown by passing the 12 appropriations through omnibus legislation and sending it to President Joe Biden for his signature. Alternatively, congressional leaders may find a way to pass a continuing resolution to extend funding for a short period while negotiations over full-year appropriations continue. However, in that case, the risk of a shutdown may merely be postponed. Finding bipartisanship in today’s polarized political environment could take time.

A shutdown next week would come at a delicate moment for the U.S. The economy continued to perform remarkably well through the summer months. The strength of jobs and retail spending data in July and August suggest headline GDP will likely reflect solid growth in the third quarter. However, a shutdown would add to the mounting headwinds already facing the economy.

These headwinds include the resumption of federal student loan repayments, striking auto workers, and the lagged effects of tight monetary policy. Combined with these pressures, a prolonged shutdown would reinforce our expectations of a marked deceleration in growth over the next two or three quarters and increase the odds of a recession.

About DBRS Morningstar

The DBRS Morningstar group of companies consists of DBRS, Inc. (Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario, Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt, Germany)(EU CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings Limited (England and Wales)(UK CRA, NRSRO affiliate, DRO affiliate). DBRS Morningstar does not hold an Australian financial services license. DBRS Morningstar credit ratings, and other types of credit opinions and reports, are not intended for Australian residents or entities. DBRS Morningstar does not authorize their distribution to Australian resident individuals or entities, and accepts no responsibility or liability whatsoever for the actions of third parties in this respect. For more information on regulatory registrations, recognitions and approvals of the DBRS Morningstar group of companies, please see: https://www.dbrsmorningstar.com/research/225752/highlights.pdf.

The DBRS Morningstar group of companies are wholly-owned subsidiaries of Morningstar, Inc.

© 2023 DBRS Morningstar. All Rights Reserved. The information upon which DBRS Morningstar credit ratings and other types of credit opinions and reports are based is obtained by DBRS Morningstar from sources DBRS Morningstar believes to be reliable. DBRS Morningstar does not audit the information it receives in connection with the analytical process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS Morningstar credit ratings, other types of credit opinions, reports and any other information provided by DBRS Morningstar are provided “as is” and without representation or warranty of any kind and DBRS Morningstar assumes no obligation to update any such ratings, opinions, reports or other information. DBRS Morningstar hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS Morningstar or its directors, officers, employees, independent contractors, agents, affiliates and representatives (collectively, DBRS Morningstar Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of credit ratings, other types of credit opinions and reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS Morningstar or any DBRS Morningstar Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. IN ANY EVENT, TO THE EXTENT PERMITTED BY LAW, THE AGGREGATE LIABILITY OF DBRS MORNINGSTAR AND THE DBRS MORNINGSTAR REPRESENTATIVES FOR ANY REASON WHATSOEVER SHALL NOT EXCEED THE GREATER OF (A) THE TOTAL AMOUNT PAID BY THE USER FOR SERVICES PROVIDED BY DBRS MORNINGSTAR DURING THE TWELVE (12) MONTHS IMMEDIATELY PRECEDING THE EVENT GIVING RISE TO LIABILITY, AND (B) U.S. $100. DBRS Morningstar does not act as a fiduciary or an investment advisor. DBRS Morningstar does not provide investment, financial or other advice. Credit ratings, other types of credit opinions and other analysis and research issued by DBRS Morningstar (a) are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness, investment, financial or other advice or recommendations to purchase, sell or hold any securities; (b) do not take into account your personal objectives, financial situations or needs; (c) should be weighed, if at all, solely as one factor in any investment or credit decision; (d) are not intended for use by retail investors; and (e) address only credit risk and do not address other investment risks, such as liquidity risk or market volatility risk. Accordingly, credit ratings, other types of credit opinions and other analysis and research issued by DBRS Morningstar are not a substitute for due care and the study and evaluation of each investment decision, security or credit that one may consider making, purchasing, holding, selling, or providing, as applicable. A report with respect to a DBRS Morningstar credit rating or other credit opinion is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS Morningstar may receive compensation for its credit ratings and other credit opinions from, among others, issuers, insurers, guarantors and/or underwriters of debt securities. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS Morningstar. ALL DBRS MORNINGSTAR CREDIT RATINGS AND OTHER TYPES OF CREDIT OPINIONS ARE SUBJECT TO DEFINITIONS, LIMITATIONS, POLICIES AND METHODOLOGIES THAT ARE AVAILABLE ON https://www.dbrsmorningstar.com. Users may, through hypertext or other computer links, gain access to or from websites operated by persons other than DBRS Morningstar. Such hyperlinks or other computer links are provided for convenience only. DBRS Morningstar does not endorse the content, the operator or operations of third party websites. DBRS Morningstar is not responsible for the content or operation of such third party websites and DBRS Morningstar shall have no liability to you or any other person or entity for the use of third party websites.