The current government shutdown is making history as the longest one experienced in the U.S. But what’s alarming is how damaging it has already become.
Typically, when the government reopens, the economy bounces back quickly. However, the ongoing 36-day shutdown, which started on October 1, is hitting millions hard. Many Americans are missing crucial food benefits, about 1.4 million federal workers aren’t receiving their paychecks while still working, and crucial economic data has stalled. This lack of information leaves investors in the dark about the state of the economy.
Alec Phillips, chief political economist at Goldman Sachs, noted in a recent report that this shutdown could have the most significant economic impact ever recorded. If it ends soon, the growth of the real gross domestic product (GDP) could still see a decline of about 1.15 percentage points in the fourth quarter, according to Goldman Sachs.
The Congressional Budget Office estimates that GDP could drop by one to two percentage points due to the shutdown. They also warned that the longer this situation lasts, the worse it will get. While recovery is expected when the government reopens, some financial damage may linger, with estimates of permanent losses ranging between $7 billion and $14 billion.
Goldman Sachs is now predicting a weak fourth-quarter GDP growth of just 1%, a notable drop from previous forecasts of 3% or even 4% for the third quarter. The impact grows more pronounced because this shutdown is broader than previous ones. For instance, the 2018-2019 shutdown affected only 10% of government spending, compared to the current situation, which involves 100%.
David Kelly, chief global strategist at JPMorgan Asset Management, reminds us that the economy was already slowing down due to various factors, like high tariffs, low immigration, and renewed student debt payments. He finds it shocking how much pain both parties are causing for political leverage.
The precise economic fallout from the shutdown remains murky, mostly due to the information blackout it creates. Only one significant report, the September Consumer Price Index, has been released. Key data about employment, inflation, and consumer spending are on hold, creating confusion among policymakers.
In an unprecedented move, the Federal Reserve recently decided on interest rates without the monthly jobs report. This lack of clarity may lead to more cautious actions from the Fed, as noted by Chair Jerome Powell, who said, “What do you do if you’re driving in the fog? You slow down.”
Once the government reopens, the economy is expected to recover, with Goldman Sachs anticipating a 1.3 percentage point boost to GDP in the first quarter of the following year, marking a steady growth pace of around 3.1%. However, there are elephants in the room. The uncertain policy surrounding back pay for furloughed workers, which has now been questioned, could have lasting effects.
The longer the shutdown persists, the more everyone feels the sting—from ordinary citizens to investors and policy-makers alike. While recovery seems possible, the significant losses already incurred can’t be ignored.
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