The economic effect of past government shutdowns has been clear. The economy loses some activity for a few weeks and then recovers it after the government reopens. The net cost is basically zero.
This time, the math may not be so benign.
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As Washington’s impasse drags into its fourth week with no end in sight, it appears this could become one of the longest shutdowns in the United States.
In the previous record of 34 days in 2018, Congress passed enough budget bills to keep more of the government funded. This time, none were approved.
And the White House is trying to lay off thousands of people and threatening to withhold retroactive pay for furloughed workers despite a 2019 law requiring them to be paid.
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“That would obviously have a larger macroeconomic impact,” said Michael Zdinak, director of the U.S. economics team at S&P Global Market Intelligence.
Then there are the services these workers are not providing — including tours in national parks and reviews of new medicines — that support commerce.
For many companies, the timing couldn’t be worse, with the holiday season approaching and economic uncertainty already high.
“If you are concerned about the potential for these indirect impacts, they only increase the longer the shutdown goes on,” Zdinak said.
Economists estimate that the shutdown will shave between 0.1 and 0.2 percentage points off annual growth in economic output for each week it drags on.
That amounts to $7.6 billion to $15.2 billion per week, based on the hours government employees are not working, according to Oxford Economics.
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The 2018 shutdown shaved just under 0.1 percentage points off annual growth per week, according to the Bureau of Economic Analysis.
This estimate does not capture the ways in which federal services support economic activity in other sectors, where the effect may be narrow but profound.
Consider visa processing. Much of it is carried out by contractors, who were told to stop work on October 1st. Unlike government employees, they will not receive retroactive pay when the shutdown ends.
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Brandon Muniz is the owner of a Maryland-based information technology provider, HeiTech Services, which relies on federal contracts.
He has already lost business this year due to government cost cuts, and in recent weeks has had to reduce the hours of staff members who cannot evaluate applications for green cards and employment-based visas until the government reopens.
Muniz had to lay off 15 people this year and furlough another 25 because of the strike. He worries about getting them back if they find other jobs and keeping the business alive in the meantime.
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“All of our overhead costs for our headquarters team, the facilities, the vehicles that they have, we still have to pay,” Muniz said. “These are things we take into account when we put together a proposal for a contract, but it is very difficult to take into account something like a shutdown.”
The individuals and businesses HeiTech serves — such as farmers, seasonal attraction operators and seafood processors — are dealing with backlogged visa applications.
Small businesses that rely on one or two foreign workers with specific skills are in limbo, said Mark Neuberger, an attorney at Foley & Lardner in Miami who helps clients with employment issues.
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“Even a short outage shuts down operations for months, and they have to clean up the mess from when they were away,” Neuberger said.
The federal government also underwrites a significant portion of the credit markets through agencies whose work has been significantly reduced, including the Small Business Administration and the Department of Agriculture.
The pause in federal loan processing poses the biggest hurdle for low-income borrowers who would otherwise qualify for a mortgage backed by the Department of Agriculture’s program for rural areas.
But even people with private mortgage approvals in disaster-prone areas are being hurt because they don’t have access to the National Flood Insurance Program.
For farms and small businesses, October is a critical month for borrowing money. Some are paying their taxes, having gotten a six-month extension since the spring. Others are trying to stock up on inventory or purchase equipment for the upcoming planting season.
Federal agencies often offer more affordable terms than private lenders, and if these are unavailable, borrowers may turn to more expensive options.
“They will try not to invest money or hire more people now,” said Rohit Arora, CEO of Biz2Credit, an online lending platform. “If that doesn’t solve the problem, credit cards come first, but there will be a subset of customers who will be forced to borrow money at a much higher cost.”
The timing of the shutdown is problematic for another reason: Monetary policymakers are moving forward blindly without critical labor and inflation data produced by statistical agencies.
The economy is already approaching a point of stagnation and is being hit by tariffs and aggressive immigration enforcement. The lack of signs of a more serious slowdown — or an acceleration — could lead policymakers to make an interest rate decision that they could regret once the data becomes clearer.
Federal data also informs smaller decisions. The Department of Agriculture produces weekly reports on global production and demand that help farmers decide where to market their crops and what to plant next year.
“This is not a great time for a lack of information,” said Todd Davis, chief economist at the Indiana Farm Bureau. “Farmers are trying to make business plans, organizing their production, deciding whether they want to sell it at harvest or store it to get a higher price later.”
There are many other ways that suspended government services can dampen economic activity.
Licenses are not being issued, research grants are not being processed, construction contracts are not being executed, products are not being inspected.
If ships start to back up at ports due to understaffing at customs offices, perishable goods could spoil, and airline delays are increasing.
But some of the most serious ramifications come from risks that aren’t being managed. It’s hurricane season, for example, and small disasters can become larger ones if the National Weather Service can’t warn communities about a storm and if the Federal Emergency Management Agency isn’t at full strength to respond.
David Bernstein, a consultant with a company called BSI that helps companies plan for emergencies, said businesses could face disruptions beyond the variables they normally track.
“You can’t control all those other things that are going on,” Bernstein said. “And you’re going to start to see these cascading impacts emerge.”
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