Government Shutdown 2023

Economic Consequences

Goldman Sachs

Unlike the debt limit, where Congress reached a deal because the potential hit to the economy from an impasse would have been so severe, a shutdown would be much more manageable from a macroeconomic perspective,” Goldman Sachs Chief U.S. Political Economist Alec Phillips writes in the team’s report. “However, compared to the debt limit, the less severe economic effect of a shutdown also makes it more likely that Congress fails to act in time.”

A government-wide shutdown would directly reduce growth by around 0.15 percentage point for each week it lasted, or about 0.2 percentage point per week once private sector effects were included, and growth would rise by the same cumulative amount in the quarter following reopening,

While federal spending is equal to almost a quarter of gross domestic product, the impact of a shutdown is much smaller, for four reasons:

1. Only discretionary spending would be affected, about a quarter of federal outlays, because mandatory spending (on programs like Medicare and Social Security) runs automatically subject to rules Congress has established.
2. Only departments that Congress has not funded would shut down.
3. Shutdowns primarily affect the work of federal employees (federal pay amounts to roughly 2% of GDP), with little impact on investment or purchases of goods and services.
4. The majority of federal employees, roughly 65%, would continue working during a shutdown because the services they provide are likely to be deemed essential.

Markets have not reacted strongly to past shutdowns, according to Goldman Sachs Research. At the close of the three prolonged shutdowns since the early 1990s, equity markets finished flat or up even after dipping initially. The dollar weakened slightly after prior shutdowns began and the 10-year Treasury yield generally declined

The Effects of the Partial Shutdown Ending in January 2019

• CBO estimates that the five-week shutdown delayed approximately $18 billion in federal discretionary spending for compensation and purchases of goods and services and suspended some federal services.
• As a result of reduced economic activity, CBO estimates, real (that is, inflation-adjusted) gross domestic product (GDP) in the fourth quarter of 2018 was reduced by $3 billion (in 2019 dollars) in relation to what it would have been otherwise. (Such references are in calendar years or quarters unless this report specifies otherwise.) In the first quarter of 2019, the level of real GDP is estimated to be $8 billion lower than it would have been—an effect reflecting both the five-week partial shutdown and the resumption in economic activity once funding resumed.
• As a share of quarterly real GDP, the level of real GDP in the fourth quarter of 2018 was reduced by 0.1 percent, CBO estimates. And the level of real GDP in the first quarter of 2019 is expected to be reduced by 0.2 percent. (The effect on the annualized quarterly growth rate in those quarters will be larger.)
• In subsequent quarters, GDP will be temporarily higher than it would have been in the absence of a shutdown. Although most of the real GDP lost during the fourth quarter of 2018 and the first quarter of 2019 will eventually be recovered, CBO estimates that about $3 billion will not be. That amount equals 0.02 percent of projected annual GDP in 2019. In other words, the level of GDP for the full calendar year is expected to be 0.02 percent smaller than it would have been otherwise.
• Underlying those effects on the overall economy are much more significant effects on individual businesses and workers. Among those who experienced the largest and most direct negative effects are federal workers who faced delayed compensation and private-sector entities that lost business. Some of those private-sector entities will never recoup that lost income.
• All of the estimated effects and their timing are subject to considerable uncertainty. In particular, CBO is uncertain about how much discretionary spending was affected by the partial shutdown, how affected federal employees and contractors adjusted their spending in response to delayed compensation, and how agencies will adjust their spending on goods and services now that funding has resumed.

CBO’s estimates do not incorporate other, more indirect negative effects of the shutdown, which are more difficult to quantify but were probably becoming more significant as it continued. For example, some businesses could not obtain federal permits and certifications, and others faced reduced access to loans provided by the federal government. Such factors were probably beginning to lead firms to postpone investment and hiring decisions.