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HomeBusinessNPR Explores the Potential Economic Impact of a Government Shutdown, Puzzling Economists

NPR Explores the Potential Economic Impact of a Government Shutdown, Puzzling Economists

Without a deal on Capitol Hill, current spending laws expire on Sept. 30. Ahead of a potential government shutdown, Wall Street is gaming out what it could mean for the U.S. economy.

MICHEL MARTIN, HOST:

Hopes for a deal to keep the government open are not high here in Washington.

STEVE INSKEEP, HOST:

Yeah. It’s September 25, which means Congress only has about five days left to avoid a government shutdown. Given the infighting in the Republican Party, it looks less likely that a deal can be reached in time, which leads to the question of what effects a government shutdown could have on the U.S. economy.

MARTIN: NPR’s David Gura is with us now to talk about all this. Good morning, David.

DAVID GURA, BYLINE: Hey, Michel.

MARTIN: So let’s point this out again. The people who get your Social Security checks out, who process your passports, all these functions of government – these people won’t be getting paid. But what could the other economic effects of a government shutdown be?

GURA: Yeah. I don’t want to diminish the difficulty of that both to people and businesses. Keep in mind, though, that when there is a shutdown, everyone does get paid eventually. But, yeah, hundreds of thousands of government workers wouldn’t get paid. The government wouldn’t be able to pay for what it’s bought. That has a direct effect on the economy, all kinds of knock-on effects. The severity of a shutdown will depend on how long it lasts, if there is one. And if it were to go on for a couple of days, couple of weeks – well, the fallout from that would not be huge. But if it were to last longer, then the U.S. economy would take a bigger hit. The financial services firm EY says a shutdown would take one-tenth a percentage point off of GDP every week. Greg Daco is the chief economist at EY who tells me a concern of his is when this could happen.

GREG DACO: It comes at a time when we are seeing other threats to the economy.

GURA: Michel, the economy is facing all kinds of head winds right now, and the Fed Reserve fight against high inflation hasn’t ended it.

MARTIN: Well, so tell us more about those potential head winds.

GURA: It’s a long list of them, according to Fed Chair Jerome Powell. Growth is already slowing. Soon, student loan payments are starting back up for 40 million borrowers. Autoworkers are on strike. Energy prices have been rising pretty steadily. One other thing is during a shutdown, policymakers would not be able to get any new economic data. That’s because the government officials in charge of that data wouldn’t be able to work. And as I look at my calendar here on my desk, Michel, the Labor Department is scheduled to release its next jobs report on Friday, October 6, so just a few days after the fiscal year ends, and we’re supposed to get new inflation data less than a week after that.

MARTIN: Well, say more about that, though. How would something like not being able to get fresh data become a significant problem for the economy?

GURA: So it depends, again, on how long a shutdown lasts, but it could be a big problem. You know, after the last Fed meeting, the Fed chair reiterated he and his colleagues are making decisions about raising interest rates based on the data. If the government can’t collect those data and distribute them, Greg Daco says Fed policymakers would be in a real bind at their next meeting.

DACO: This lack of data in the midst of a government shutdown would essentially mean that economists, investors and policymakers would be flying partially blind.

GURA: Flying partially blind, which would be a real challenge for the Fed, which is, of course, hoping to pull off that soft landing, getting high inflation under control without triggering recession.

MARTIN: OK, as quickly as you can – if there’s a shutdown, what effect is that going to have on how investors – who do have a lot to say about the economy – how they view Washington’s decision making?

GURA: Yeah. There’s frustration. There’s fatigue. I’ll say, during past shutdowns, the market reaction has been pretty muted. Alec Phillips is the chief political economist at Goldman Sachs.

ALEC PHILLIPS: It’s difficult to say that this will be a major negative for the market, assuming that it, you know, follows the pattern of previous shutdowns.

GURA: But, of course, those political divisions aren’t going away anytime soon. So it’s crisis after crisis, and that could take a toll, Michel.

MARTIN: That’s NPR’s David Gura. David, thank you.

GURA: Thank you.

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