The longest government shutdown in U.S. history has already hurt the economy, but economists may struggle to fully assess the damage because the closure also disrupted key data.
The impact of the six-week shutdown on the economy has grown every day. Government employees on furlough reduced spending and went without pay in thousands of cases. Many low-income households had to further tighten their budgets as a result of Supplemental Nutrition Assistance Program (SNAP) delayed payments. The disruption was exacerbated by flight delays and cancellations.
Government shutdown is harming consumer spending power
Additionally, the shutdown reduced Americans’ economic outlook and increased uncertainty. According to a University of Michigan study released last Friday, 71% of respondents anticipate higher unemployment in the upcoming year, which is the highest level since 1980.
Experience has shown that once the government reopens, the economy usually recovers the majority of its losses. Eight Senate Democrats joined Republicans in advancing a bill to break the impasse, which could lead to a reopening as early as this week. The agreement guarantees back pay for furloughed federal employees, which will replenish household budgets and encourage catch-up spending.
It is still difficult for economists and decision-makers to discern between short-term shutdown effects and more serious economic vulnerabilities. Evidence indicated that the job market had slowed and that consumers with lower and middle incomes were becoming more frugal with their spending even before the closure started on October 1. “It’s not as if you had a shutdown in an environment where people were comfortable saying the next six months was going to look like the last six months,” said Robert Barbera, director of the Johns Hopkins University Center for Financial Economics.
A six-week shutdown would lower fourth-quarter annualized GDP growth by 1.5 percentage points, according to the Congressional Budget Office (CBO). The CBO warned that such estimates are challenging, citing the 2019 shutdown as an example. Oxford Economics predicted a smaller hit of roughly one percentage point.
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