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Read moreA shutdown would halt most agency activities and services and require all nonessential government personnel to take unpaid leave (known as furloughing). Employees of private firms that contract with the federal government could also be subject to layoffs.
Importantly, essential personnel (air traffic controllers, food safety inspectors, the armed forces, etc.) would not be affected by the shutdown. Similarly, the Postal Service would not be affected as it has separate funding. The Fed is also funded outside the congressional appropriations process and would not be affected. Treasury auctions are not affected by government shutdowns.
The last government shutdown was also the longest on record. It lasted 35 days in December 2018 and January 2019, with about 375,000 federal employees furloughed and another 425,000 required to work without pay.
The economic impact of any government shutdown depends on its duration and scope as some shutdowns have been partial, with some departments being funded. A very brief shutdown would have a negligible impact on the economy.
Excluding the Postal Service, there are about 2.3 million federal employees, of which roughly 800,000 are non-emergency workers. Based on an average annual salary of $95,000 per federal worker, the annual compensation bill for federal workers is $76 billion. This translates into a weekly bill of $1.5 billion – assuming all workers remained on furlough. On an annualized basis, a one-week furlough would cut $6b, or 0.1%, off real GDP growth in Q4 (even though furloughed workers have always been paid retroactively).
Apart from the direct macroeconomic consequences of a shutdown, financial markets and private sector confidence could also be affected. The 35-day government shutdown in 2018–19 led to rising policy uncertainty and a sharp decline in private sector confidence, with the University of Michigan Consumer Sentiment Index posting its most significant decline since 2012.
A government shutdown would lead to a delay in economic data releases as agencies would suspend data collection, processing and dissemination. In 2018–19, the 35-day shutdown led to a data drought with the postponement of over 10 key economic data releases, including trade, housing, and consumer spending data.
Given the elevated degree of economic and policy uncertainty, the absence of data could carry a significant cost for private sector economists, investors and Fed policymakers, who would fly partially blind as they assessed the US economy’s performance.
While private sector data could help fill some of the blind spots, the delays in official data reports would constrain data-dependent Fed policymakers as they navigated a new phase in the recalibration process.
The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
