How Will the Government Shutdown Affect the US Economy?

The federal government shutdown is unlikely to have a meaningful macroeconomic impact unless it lasts much longer than prior shutdowns. These shutdowns happen when Congress and the president fail to enact funding bills authorizing federal spending for the new fiscal year. Currently, the Republicans hold the presidency and a majority in Congress, but Senate Democrats are blocking any funding bills via the filibuster. Democrats’ stated aim is to use their leverage to reverse recent healthcare cuts, among other priorities.

For the duration of a shutdown, most federal discretionary spending payments are postponed. Discretionary spending was $1.8 trillion in fiscal 2024, accounting for 26% of federal spending and 6% of the US GDP. The rest of federal spending consists of mandatory spending and interest payments, which largely continue uninterrupted. Mandatory spending consists largely of major transfer programs like Social Security, Medicare, and Medicaid. In a shutdown, the checks for these programs will continue to be sent out, although certain administrative services (like processing new applicants) could be affected.

Compensation of most federal employees is postponed during a shutdown (indeed, federal employee compensation is the biggest component of federal discretionary spending). But once the shutdown is over, employees will receive complete back pay. Other delayed payments (such as purchases from private firms of goods and services) are also generally paid in full.

Around 700,000-800,000 federal employees are expected to go on furlough during the shutdown—about a quarter of the federal workforce, or 0.5% of US nonfarm payroll employment. But virtually all federal employees (2% of US employment) will see their paychecks postponed during the shutdown, whether or not they continue to work.

Most shutdowns have been very short. Only three lasted longer than a week: 1995-1996, 2013, and 2018-19. But even the longest (2018-19) lasted only 35 days. Combined with the fact that payments are merely postponed and not canceled, this means their macroeconomic impact has been minor, largely limited to the quarters in which they occurred.

Any long-run impact is negligible. The Congressional Budget Office estimates that the record-long 35-day shutdown from Dec. 22, 2018, to Jan. 25, 2019, subtracted just 0.2% from the real GDP in the first quarter of 2019. But GDP in subsequent quarters was higher than it would’ve been otherwise (recouped spending), so the impact on 2019 annual average GDP was just 0.02%. Similarly, unless the current shutdown lasts much longer than the previous record, we don’t expect a significant macroeconomic impact.

One wrinkle this time around is that President Donald Trump is threatening to lay off some of the furloughed federal employees. We haven’t heard specific numbers, and we don’t know what to make of this threat. If these employees were considered expendable, they could’ve been included in the Department of Government Efficiency layoffs earlier in the year. Additionally, nothing about a shutdown makes it easier to fire federal workers. So we doubt the layoffs will amount to much.

The shutdown does have one important implication: Major US economic data releases will mostly be suspended. For example, the jobs report scheduled for Oct. 3 will not be released if the shutdown continues through then. It’s a bit of an exaggeration to say that the Fed and economists are “flying blind,” however. No single month’s worth of data should hold overwhelming weight in assessment of the economy. As long as the shutdown lasts a month or less, and assuming the state of the economy isn’t evolving abnormally rapidly, we won’t miss the interruption of data too much.