Here We Go Again: Showdowns and Shutdowns

While government shutdowns impact the economy directly and indirectly, the magnitude of the impact is determined by the length and scope of the shutdown. Some operations can continue in a “partial shutdown” scenario, and thus impact the economy differently. During a shutdown, the government temporarily pauses nonessential operations and furloughs nonessential federal workers and halts appropriations of what is called discretionary spending, which is about 27% of total federal expenditures. Meanwhile, mandatory spending like Social Security and Medicare will continue, as they do not require annual congressional approval. However, some of the services associated with the provision of these essential services could be affected if workers are furloughed.

GDP (Government Spending Component):

Over the past 3 years, government spending has represented about 6.6% of total GDP. Out of that 6.6%, about 2/3 goes to mandatory spending—according to the U.S. Treasury—which would be marginally impacted by the shutdown (e.g., Medicare, Social Security, etc.). The remaining 1/3 that goes to discretionary spending would be more impacted. Also of note, shutdowns don’t cancel spending but delay it. If the shutdown is short-lived, spending will catch up within the same quarter-reporting period and no subsequent measured effect will be felt on GDP.

Historical example from the Congressional Budget Office (CBO): The CBO estimated the GDP impact in 2019 to have been about -0.2 PP percentage points from the headline number (1Q19), but they also mentioned that this negative impact was made up for in subsequent quarters. (This government shutdown lasted about 1 month.)

Employment (Federal Employees):

To put things in perspective, federal employees make up, on average, ~2% of the total U.S. nonfarm payrolls. Even if the government does shut down, not all these workers will be impacted as ‘excepted’ workers will continue to contribute to the limited functions of the government. Those impacted will be ‘furloughed’ and not laid off, which is an important distinction since they will receive the pay back after the shutdown ends. Thus, their contribution to GDP may, in a worst-case scenario, be detracted from the current period but added back once the government reopens.

Perhaps the biggest issue for furloughed federal government employees will be dealing with the payments of debts, especially if they are living paycheck to paycheck.