Governnment shutdown watch

Summary

A possible government shutdown looms on the horizon, with Congress struggling to pass a bill that would fund the federal government beyond September 30. But what is a government shutdown, and what are the potential economic implications of one?

A government shutdown impacts the 26% or so of federal spending that is characterized as "discretionary." "Mandatory" spending, such as outlays for Social Security, Medicare and Medicaid, is not part of the annual appropriations process and thus generally continues unabated.

During a government shutdown, unfunded federal agencies must discontinue non-essential functions. Essential services, such as those related to public safety or national security, continue to operate.

Civilian federal employment is roughly 2.3 million excluding the self-funded Post Office, and active duty military personnel total another 1.3 million. Federal government employees deemed "essential" continue to work during a shutdown, but they do not receive pay. "Non-essential" employees are furloughed and their activities cease. All workers receive back pay after the shutdown ends.

On Friday, September 19, Republicans in the House of Representatives passed a continuing resolution (CR) that funds the government through November 21. It will take at least 60 votes to break a Senate filibuster and pass the CR through the upper chamber, but so far Senate Democrats have been reluctant to pass the bill. Differing views on the level of spending, the allocation of spending across programs, health care policy and Democratic frustration over the Trump administration's impoundment/recissions are among the issues driving the budget stalemate.

Past government shutdowns are instructive for assessing the potential economic impact. The direct hit to economic growth in the 2013 and 2018–2019 government shutdowns was relatively modest at a few tenths-of-a-percentage point. GDP growth rebounded by a similar amount once the shutdowns ended. That said, not all the lost economic activity was recovered in full, and the indirect hit to the economy is more difficult to measure yet nonzero.

A shutdown could delay influential economic data reports published by government agencies. Following the 16-day government shutdown in 2013, the monthly Employment Situation and Consumer Price Index reports, among others data points, were delayed by about two weeks. Collection, processing and publication delays stretched into the following month as well. This time around, the critical September employment report is due to be released on October 3, while the September CPI report is slated to be released on October 15.

It is important to note that the current government shutdown episode is unrelated to the debt ceiling. The U.S. debt limit was increased by $5 trillion in the Republican-passed One Big Beautiful Bill in July. As a result, the government would not run out of borrowing capacity in the event of a shutdown, and Treasury security issuance would not be impacted.

Economic disruption from a prolonged government shutdown and an extended delay of key government data releases would inject additional uncertainty into the monetary policy outlook. Furthermore, even if a CR is passed in the next week that averts a shutdown, another budget fight before year-end seems likely.

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