For the third time this year, stalemate in Washington is again threatening the US economic outlook. If Congress is unable to agree on a funding bill by November 17, the federal government will be forced to halt most discretionary spending. Depending on its length and severity, this shutdown could rattle global bond markets, increase November unemployment, and imperil short-term GDP growth. A shutdown could also have more lasting economic effects by discrediting the US’ reputation as steward of the global financial system and obscuring the Federal Reserve’s ability to guide the economy to a soft landing.
With no new appropriations, the shutdown will halt most discretionary federal government spending—around 27 percent of overall federal spending—though not mandatory spending on programs such as Social Security, Medicaid, or Medicare. The effects of this will be immediately felt on the US economy as the government stops providing or purchasing certain goods and services until funding resumes. Public and private sector estimates generally project this to lower annualized quarterly GDP growth by 0.2 percentage points for each week it lasts.
If the funding impasse is brief, the impact will be negated once government spending resumes. Shutdowns delay government spending, but do not cancel it. An extended shutdown of two to three weeks could have more lasting GDP effects. While net government spending will remain unchanged, uncertainty around the situation could dent consumer confidence. Following the 2013 shutdown, a survey found around 47 percent of Americans curbed spending. This could have a small, but lasting effect on the US economy. A temporary shuttering of some important economic programs, such as Small Business Administration loans, could also amplify this.
Hundreds of thousands of government employees would also be furloughed. Previous shutdowns have furloughed around 800,000 civilian workers. This year, one estimate projects the number at 737,000.
The shutdown will likely have a minimal impact on markets. Past shutdowns have been non-events for US and global stock markets. Treasuries may experience a slight rally as investors park capital to avoid the minor uncertainty stemming from the shutdown. Market risks are lower than the spring debt limit battle as a shutdown will not impact the Treasury Department’s ability to cover bond payments or issue new debt.
A government shutdown, especially if it is extended and severe, is one of a number of headwinds increasing bond market volatility. Taken with additional sources of global market volatility like the war in Gaza and the prospect of higher-for-longer US and global interest rates, the shutdown could undermine investor confidence.
A severe and sustained shutdown could have serious implications for the US Federal Reserve’s ability to guide the US economy. While the Fed will continue normal operation—its staff will continue working and be paid—some of the agencies which it relies on for data, like the Bureau of Labor Statistics, will not. If it lasts, a shutdown will stop the publication of key October and November data including the November Initial Jobless Claims (November 22 and 30), Revised Q3 GDP growth (November 29), October Durable Goods Orders (November 22) and October Personal Income and Spending (November 30). An extended shutdown could also diminish November’s data quality. Shutdowns suspend data collection so if it lasts more than two weeks, BLS statisticians will be forced to collect retrospective data, rather than current data. In particular, this could reduce the quality of November CPI and possibly employment data because of the ways the subcomponents of these datasets are collected.
This potential reduction in data availability and reliability comes at a particularly inauspicious time. A combination of headwinds and shifting macroeconomic fundamentals have contributed to the highest level of macroeconomic uncertainty since the aftermath of the global financial crisis. For a Fed that continues to emphasize its “data-dependent approach,” the shutdown could impede its ability to calibrate its monetary policy and prevent it from developing an up-to-date, accurate understanding of the latest developments in the US economy ahead of its December 12 and 13 meetings.
An extended delay in data collection and publication could be especially damaging in the leadup to the December Fed meetings as meeting participants will submit their projections of the most likely outcomes for real GDP growth, unemployment, and inflation for each year from 2023 to 2026 and over the longer run. A lack of data could muddle these projections, obscuring the direction of the US economy. Beyond the Fed, this could force fiscal policymakers, investors, businesses, and consumers to fly blind as they make key economic decisions.
Governments and investors around the world are taking note that, for the third time in less than a year, brinkmanship in Washington threatens the US government’s ability to function. Last week Moody’s, a credit rating agency, lowered its outlook on the US credit rating to “negative” from “stable.” Moody’s actions follow a downgrade earlier this year by Fitch, another ratings agency, after this spring’s political dysfunction around the US debt ceiling.
While a brief and shallow shutdown will likely pass mostly unnoticed by economic actors and markets, if the impasse persists for more than a couple of weeks it could have more serious implications for US employment and growth. A shutdown would also draw attention to Congress’s current inability to operate effectively and could impact global perceptions of the United States’ ability to manage its own fiscal affairs—as well as to lead the global economic system.
Niels Graham is an associate director for the Atlantic Council GeoEconomics Center where he supports the center’s work on China’s economy and US economic policy.
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