A federal government shutdown probably wouldn’t be enough to derail the solid U.S. economy. But it could inject more uncertainty into an already murky economic outlook.
Funding for the federal government will lapse at the end of Friday if Congress doesn’t reach a deal to extend it. It is still possible that legislators will act in time to prevent a shutdown, or will restore funding quickly enough to avoid significant disruptions and minimize any economic impact.
But if the standoff lasts beyond the weekend, most federal offices will not open Monday, and hundreds of thousands of government employees will be told not to work. Others will be required to work without pay until the government reopens.
For those workers and their families, the consequences could be serious, especially if the impasse drags on. Federal law guarantees that government workers will eventually receive back pay, but that may not come in time for those living paycheck to paycheck. And the back-pay provisions don’t apply to consultants or contractors. During the last government shutdown — a partial lapse in funding in late 2018 and early 2019 — federal workers lined up at food pantries after going weeks without pay.
For the economy as a whole, the effects of a shutdown are likely to be more modest. Many of the most important government programs, like Social Security and Medicare, would not be affected, and government services that are deemed “essential,” such as air traffic control and aviation security, can continue at least temporarily. Federal workers who put off purchases are likely to make them once their paychecks restart.
Forecasters at Goldman Sachs estimate that a shutdown would exert a small but measurable drag on the economy, reducing quarterly economic growth by about 0.15 percentage points for every week the lapse in funding continues. Most of that toll, though not all, would reverse in the next quarter. Other forecasters have released similar estimates.
The Congressional Budget Office estimated in 2019 that the last shutdown, which ended after 35 days, had only a modest and short-lived impact on economic output. That was only a partial shutdown, however — large parts of the government, including the Departments of Defense, Labor, and Health and Human Services, remained open.
A funding lapse now would affect a much larger part of the government, and therefore could cause more severe damage if it lasted a while. But that makes a long shutdown less likely, said Bobby Kogan, a former budget official in the Biden administration who now works at the Center for American Progress. He noted that the last shutdown had ended when it appeared that Transportation Security Administration screeners were about to stop showing up for work.
“Part of the reason these things don’t end up being catastrophic is because we stop it before it gets catastrophic,” Mr. Kogan said.
But economists warn that even if the direct effects of a shutdown are limited, the dysfunction it represents could have consequences in the long run. Government contractors may be more reluctant to hire workers and make investments if they think they can’t count on the federal government to be a reliable customer. Bond investors may demand a higher return to buy Treasury securities, in the form of higher interest rates, if they worry that political turmoil has made the U.S. government more of a credit risk.
“The natural concern is that this is just a prelude of what we’re going to get over the next four years,” said Kathy Bostjancic, chief economist for Nationwide, the insurance company. “It’s just another layer of uncertainty and maybe caution that can work against the economy.”
The economy is relatively healthy by most measures, with unemployment low, consumer spending strong and inflation much cooler than it was two years ago. That momentum means the economy can probably withstand the modest drag of a shutdown without running much risk of a recession.
But recent economic data have sent conflicting signals, with some measures suggesting that inflation could be picking back up and others that the labor market could be starting to crack.
Uncertainty about what policies the incoming administration will pursue has further clouded the economic outlook. On Wednesday, policymakers at the Federal Reserve cut interest rates by a quarter percentage point, but signaled that cuts next year were likely to be fewer and were not guaranteed.
A government shutdown would complicate the picture for the Fed, and not only by adding more uncertainty to the economic outlook. It could also imperil the data that policymakers rely on to make their decisions. Past shutdowns forced the government to delay or even cancel reports on jobs, inflation and other measures.
“If we do have a big delay in the economic data, I think it’s going to be really hard for the Fed to provide a whole lot of guidance,” said Michael Pugliese, senior economist at Wells Fargo.
The impact of such uncertainty is hard to measure, Mr. Pugliese said, but it is real.
“I don’t think that’s completely costless even if you don’t see it in the next G.D.P. report,” he said.