WASHINGTON (AP) — The longest federal government shutdown in U.S. history seems to be coming to an end, but it has left a deep imprint on an already struggling economy.
Since October 1, about 1.25 million federal workers have gone unpaid, leading to widespread effects, including the cancellation of thousands of flights, some of which will not be rescheduled even as Congress looks toward ending the shutdown. Furthermore, federal contract awards have stagnated, and benefits for some food aid recipients have been disrupted.
While most of the economic activity lost during the shutdown may be recouped once the government reopens—thanks to back pay for federal workers—some losses, such as canceled flights and missed restaurant meals, will not be restored. Gregory Daco, chief economist at EY accounting, noted, Short-lived shutdowns usually have indiscernible impacts in the data, but this one will leave a prolonged mark due to its record duration and the growing disruptions to welfare programs and travel.”
The Congressional Budget Office (CBO) has estimated that a six-week shutdown could cut growth in this year’s fourth quarter by about 1.5 percentage points, significantly lowering projections—and while first-quarter growth next year might rebound by 2.2 percentage points after reopening, an estimated $11 billion in economic activity will be permanently lost.
This fiscal crisis isn’t just harming federal workers but also adding to the existing economic challenges, including sluggish job growth, stubbornly high inflation, and uncertainty stemming from past tariffs by the Trump administration. However, most economists do not foresee a recession occurring.
Approximately 650,000 federal employees weren't working during the shutdown, potentially increasing the unemployment rate by 0.4 percentage points. The $16 billion in wages lost by federal personnel is likely to decrease consumer spending at stores and restaurants and hinder holiday travel.
The economic repercussions could be particularly pronounced in the Washington D.C. region, which has already been experiencing elevated unemployment rates due to previous federal workforce reductions. The reality for many affected states varies, especially where federal workers constitute a significant portion of the workforce.
Flight cancellations are particularly problematic, with the Federal Aviation Administration’s restrictions leading to over 2,000 flights being grounded since the shutdown began. Tourism Economics predicts the shutdown could prompt a daily travel spending reduction of $63 million, with the total losses potentially hitting $2.6 billion.
Consumer sentiment has also plummeted, dropping to a three-year low which could influence spending behaviors negatively over time. Moreover, federal spending has decreased, with significant cuts to new contracts and procurement processes risking approximately $800 million in new contracts each day of the shutdown.
The SNAP benefits for 42 million recipients have been delayed, signaling a robust financial disruption for many families. Although some states have advanced full benefits, the overall recovery strategy could involve policy adaptations to ensure continuity of services.
Amid this chaotic environment, the Federal Reserve’s economic modelling might also be jeopardized, slowing any prospective interest rate cuts due to missing crucial economic data. The overall sentiment among policymakers remains cautious about future economic trajectories as clarity continues to hang in the balance.
