What is a government shutdown and what are the potential economic implications? From Investing.com
Investing.com — The U.S. recently avoided a government shutdown, which occurs when Congress fails to pass a bill to fund federal operations, forcing agencies to shut down non-essential activities.
According to Wells Fargo (NYSE:) analysts: “The government shutdown affects only about 25% of federal spending that is characterized as ‘discretionary’.”
Programs such as Social Security, Medicare, and Medicaid, categorized as “mandatory” spending, continue unchanged.
During the shutdown, federal agencies cease non-essential functions, while essential services, including public safety and national security, remain operational.
Wells Fargo explains that civilian federal employees, totaling 2.3 million, and active duty military personnel, totaling 1.3 million, are facing outages. “Essential” employees work without pay, and “non-essential” employees are fired. All workers end up getting back wages after the closing.
The bank says the economic effects of shutdowns have historically been modest but noticeable.
Wells Fargo noted that “the direct hit to economic growth in the 2013 and 2018-2019 government shutdowns was a relatively modest few tenths of a percentage point.” While GDP growth recovered after the shutdown, some economic activity did not fully recover.
The bank adds that indirect effects, such as reduced consumer confidence and delayed investments, are harder to quantify, but they do exist.
Analysts also noted that the work stoppages were delaying the release of key economic data, such as employment and inflation reports.
After a 16-day shutdown in 2013, Wells Fargo noted that “the Labor Department’s monthly employment and consumer price index reports” faced delays of about two weeks, causing a ripple effect in economic planning.
Wells Fargo warned that the extended work stoppage adds uncertainty to economic forecasts, with broader implications for policy decisions.
“Economic disruptions from a prolonged government shutdown and an extended delay in the release of key government data would add additional uncertainty to the policy outlook and, therefore, the economic outlook,” Wells Fargo said.
