US Government Shutdown’s Economic Risks Grow the Longer It Lasts

A US government shutdown would have a cascading economic effect, beginning mildly and deepening over time as millions of workers go without salary, private contractors aren’t paid and consumer uncertainty grows over Washington’s dysfunction.

Federal contractors ranging from Elon Musk’s SpaceX to janitorial service providers for local federal buildings are bracing for up to $1.9 billion a day in lost and delayed revenue as funding lapses Oct. 1.

About 1.3 million active-duty military and another 2 million civilian federal workers won’t receive pay for the duration of a shutdown, even essential employees who have to work anyway. While federal workers will automatically get their missed salary once a shutdown ends, contract employees historically haven’t received back pay.

The blow would hit as anxiety in financial markets over high interest rates, rising oil prices and labor strikes already have driven down US stocks from their mid-July highs, with the benchmark S&P 500 index dropping more than 5% so far in September alone. Consumers are also increasingly concerned about their finances and employment prospects, with confidence slumping to a four-month low in September, according to the Conference Board’s monthly index.

Each week of a government shutdown would drag down annualized quarterly GDP growth by 0.2 percentage points, according to a Sept. 22 Bloomberg Economics report. While that would be reversed once government funding was restored, a shutdown would still have “a mild negative impact overall due to forgone economic activity and uncertainty.”

A monthlong federal funding lapse risks temporarily pushing up the unemployment rate to 4% in October, triggering a popular rule for identifying the start of a recession, Bloomberg Economics forecast.