Economic Effects of Government Shutdowns

Economic Effects of Government Shutdowns

INSIGHTi

Economic Effects of Government Shutdowns
September 22, 2023
If Congress allows appropriations to lapse on October 1, a federal government shutdown would begin.
Government shutdowns have direct and indirect impacts on the economy, the severity of which depend
largely on the shutdown’s length and scope. This Insight discusses the economic effects of shutdowns,
including effects on output, employment, and government spending. For information on the impact of a
shutdown on government operations, see CRS Report R47693, Government Shutdowns and Executive
Branch Operations: Frequently Asked Questions (FAQ), coordinated by Taylor N. Riccard.
Economic Effects
Many factors determine the extent a shutdown affects the economy, including the length of the shutdown,
which programs are excepted and continue to operate in part or full, and whether there is a “partial”
shutdown (i.e., some agencies receive appropriations). Click on the links for CRS products on the
economic effects of the FY2014 and FY2019 shutdowns.
Government Spending and GDP
The goods and services provided by the federal government (excluding government transfers) are a
component of economic output, as measured by gross domestic product (GDP), comprising about 7% of
GDP. Government shutdowns decrease government spending, so these goods and services cannot be
provided, directly decreasing output. The effect can be relatively small, given that shutdowns primarily
affect discretionary spending (about 27% of total federal spending), not mandatory spending (i.e.,
entitlement programs such as Social Security).
The timing of a shutdown matters for its effect on output. Absent any policy changes that may be agreed
to at the end of a shutdown, the shutdown itself simply delays—as opposed to cancelling—government
spending. If a shutdown is brief, then the subsequent catch-up in government spending could occur in the
same quarter that spending was delayed. Since GDP is measured on a quarterly basis, there may be little
or no measured effect in this case. If a shutdown began October 1 (the beginning of the quarter), it would
leave the rest of the quarter for the shutdown to end and spending to catch up.
According to the Bureau of Economic Analysis (BEA), it cannot quantify many of the impacts of
shutdowns on components of GDP. However, it does estimate effects on non-market services provided by
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the federal government through federal compensation data. Based on the way GDP is calculated, labor
inputs by federal employees are used to derive the value of government goods and services. Because
furloughed workers would receive back pay after the shutdown ends, there is no impact on current-dollar
federal compensation, used to measure nominal GDP. But the shutdown does reduce hours worked of
federal employees, which therefore reduces real (inflation-adjusted) GDP. For the most recent (partial)
shutdown from December 22, 2018, through January 25, 2019, BEA estimated the effect to have directly
decreased real GDP growth by 0.1 percentage point in the fourth quarter of 2018 and 0.3 percentage point
in the first quarter of 2019. Considering the effect of shutdowns on GDP more broadly, the Congressional
Budget Office estimated the shutdown to decrease the level of real GDP in the first quarter of 2019 by
0.2%, which was mostly made up in subsequent quarters.
Employment
During a government shutdown, many federal workers are furloughed, apart from “excepted” workers
necessary for the limited functions that continue through a shutdown. Additionally, private government
contractors and other affected businesses may furlough or lay off workers. Furloughs reduce economic
activity—employees that do not work are not contributing to production.
The Bureau of Labor Statistics (BLS) produces employment data. Depending on when a shutdown takes
place, BLS surveys that collect employment statistics may or may not be affected. Furloughed
government workers are categorized as “unemployed, on temporary layoff” if they were furloughed for
the entire reference period of the survey in question. In 2023, the reference week is October 8-14. A
shutdown that ended before or during (or started after) that week would have no effect on official labor
market data. During the FY2014 shutdown, which occurred during the survey period, there was a large
one-month spike of approximately 400,000 federal workers reported as not working.
Indirect Effects
Shutdowns can indirectly affect other components of GDP apart from government spending. Notably,
personal consumption expenditures, which typically make up about two-thirds of GDP, may be indirectly
decreased if delayed or stopped payments affect consumption decisions. For example, federal workers
may decrease their spending as a result of not receiving a paycheck on time. In the past, federal workers
were uncertain whether they would receive retroactive pay when the shutdown ended. However, P.L. 116-
1 required retroactive pay for federal workers in future shutdowns, which may reduce effects on consumer
spending.
Depending on its length, a shutdown could also harm consumer and investor sentiment, reducing private
consumption and investment. Other disruptions to permitting, licensing, and verifications could lead to
delays in lending and trade activity, for example.
Indirect effects are more difficult to accurately measure and, therefore, are often not included in estimates
of economic effects of shutdowns. However, some research suggests that these effects can be significant.
For example, a Goldman Sachs survey indicated that two out of five Americans lowered consumption
during the FY2014 shutdown.
Estimates for a FY2024 Shutdown
According to research from Goldman Sachs, “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.” More generally, several private sector economists expect the economic

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effects of a potential shutdown to be fairly small, although the current economic context is different than
it was in FY2019 or FY2014, causing some uncertainty. In particular, several sources have noted that the
publication of certain data, such as employment and inflation statistics, could be delayed, potentially
affecting the ability of the private sector or policymakers, including the Federal Reserve, to make
informed economic or policy decisions.

Author Information

Lida R. Weinstock
Marc Labonte
Analyst Macroeconomic Policy
Specialist in Macroeconomic Policy

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