Shutdown may be over – but economic ripple effect goes on

Why We Wrote This

Consumers, businesses, and investors loathe uncertainty. That's why the full effects of a government shutdown are hard to measure, and its end isn’t like turning a light switch back on.

Brendan McDermid/Reuters
A National Park Service worker cleans up outside the Federal Hall National Memorial in New York after the US government reopened, allowing about 800,000 federal employees to go back to work after a 35-day shutdown.

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The record 35-day shutdown of the US government didn’t end with a bang so much as a long whimper that will last for months. It will take time for the agencies to work through their backlog and start operating normally. Those 800,000 “nonessential” federal workers will get paychecks again, but they’re likely to stay cautious about spending, since government funding only lasts through mid-February. While business should pick up for Muhammad Saqib’s Maryland gas station and auto-repair shop near a Census Bureau office, he’s unlikely to recoup the sales he lost during the shutdown. All these losses slow the economy, albeit minimally. The Congressional Budget Office estimates the permanent economic loss at about $3 billion, not even pocket change for a $20 trillion economy. But if the shutdown adds to economic uncertainty – if businesses don’t invest and consumers don’t spend because the future looks shaky – its impact could be much bigger. Says Gregory Daco of Oxford Economics: “Uncertainty is really key to monitor at this point and make sure that we don't talk ourselves into a recession.”

The longest-ever shutdown of the federal government may be over, but Americans are still feeling its effects – which rippled into the economy in ways that are affecting everything from tourism to high finance.

With national parks closed or left unstaffed for weeks, nearby communities took a hit. Now the fate of their high-traffic seasons could hinge on whether Congress and President Trump can settle their budgetary differences during the next three weeks. In Idaho, hopes for a normal season of steelhead fishing were thrown into doubt by stalled fishing-permit paperwork, and it remains to be seen if the reopening of government – perhaps just temporary – will patch up prospects for towns dependent on revenue from visiting anglers.

Public stock offerings, an important way for young companies to finance expansion, are also still in doubt – because the three-week reprieve from Washington’s budget impasse doesn’t ensure that the months-long processing of paperwork for initial public offerings (IPOs) will get back on track.

Not least, consumer spending across the nation was crimped as some 800,000 federal employees were either on unpaid furlough or working without pay. Now, even as those paychecks are poised to resume, all those workers have been left wondering whether their income could start running dry again as soon as mid-February.

“The last few weeks were really, really slow,” says Muhammad Saqib, manager at a Maryland gas station and auto-repair shop whose business struggled while a nearby Census Bureau office was shuttered.

The 35-day shutdown didn’t actually close the whole government, but it revealed how even the temporary loss of “nonessential” federal activities imposes costs on the wider US economy. And economists say those costs are still being felt.

“It will take a bit of time for that spending to kick back up,” says Gregory Daco, chief US economist at Oxford Economics USA. “That's just the result of getting this large machine that is the government back in functioning order.”

By some estimates the direct effects – lost or delayed output by government workers – were relatively small. The Congressional Budget Office said Monday that the shutdown delayed about $18 billion in federal spending, which will cause an $11 billion drop in economic activity as measured by gross domestic product. But much of that spending will ultimately be made up in subsequent quarters. So the permanent loss from federal spending amounts to about $3 billion.

In a $20 trillion economy, that’s minuscule: the equivalent of holding a dollar and losing less than 2/100ths of a penny.

What economists call the “indirect” effects – things like postponed spending by federal employees – were even larger. And, in some cases, they may continue to drag down economic growth.

Fewer people dropping off cars or dry-cleaning

Suitland, a Maryland community just outside the nation’s capital, is a case in point. The community, not far from Joint Base Andrews where the president comes and goes on Air Force One, hosts offices for a handful of federal agencies from the Census Bureau to the National Archives.

Normally, those workers might drop off their cars for repair at the Suitland Exxon that Mr. Saqib manages. But he says gasoline sales and the repair business took a big hit. And although government offices reopened Monday he’s still watching for things to recover in the shutdown’s wake.

“I thought, we should do some sort of promotion” to get business back, Saqib says, but he’s realized that those workers still haven’t gotten their post-shutdown paychecks.

“Hopefully we’re going to start seeing them again,” returning as customers, he says.

Similarly, Taewon Kim, owner of a dry-cleaning shop nearby, says he’s waiting to see a recovery after a decline of 20 to 25 percent in his business in recent weeks. It was “not a big problem” during that time, but he says it constrained his own outlook on spending money.

Will workers return?

The shutdown may also have some lingering effects on the government’s ability to attract and retain workers.

Last week, for example, the Transportation Security Administration reported that worker absences hit 10 percent, triple the level from a year ago. TSA screeners were working without pay. Will all those federal workers come back to work – or will they look for other work, asks Stan Veuger, an economist at the American Enterprise Institute, a right-leaning think tank in Washington. How much harder will it be for the TSA to find workers to replace them?  

Many of the lowest-paid federal workers, hundreds of thousands of people who do contract jobs including janitorial and cafeteria work, appear unlikely to get back pay for the involuntary unpaid furlough time.

Having reopened government temporarily, Mr. Trump may not be able to stomach shutting it down again, even though he has threatened to if Congress doesn’t pass funding for a border wall.

Its impact would potentially spread to low-income Americans. The depletion of funds to pay for food stamps and housing vouchers for low-income families was poised to hit in coming weeks. The cutoff in food assistance alone, affecting nearly 40 million Americans, would have shaved half a percentage point off the quarterly rate of economic growth while straining affected households, Mr. Daco says.

All these threats add to economic uncertainty – which has the biggest potential to harm the economy but is extremely hard to measure.

“That’s almost impossible” to pin down, says Mr. Veuger at the American Enterprise Institute. “How likely is it that people are now unwilling to take jobs with the federal government?… Will there be some companies that choose not to invest in the US but instead in Canada because they are not willing to rely on the US federal government?”

In December, the Economic Policy Uncertainty Index – a measure created by three US economists – rose to its highest level in five years. Researchers have linked heightened uncertainty with stock price volatility and cuts in investment and jobs at defense and other industries closely tied to federal policy.

“Uncertainty is really key to monitor at this point,” says Daco, “and make sure that we don’t talk ourselves into a recession.”

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