The Economic Impact of a Federal Government Shutdown

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Will the U.S. recovery be jeopardized if Republicans and Democrats don't agree on a budget by Friday?

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Would a federal government shutdown harm the still-fragile U.S. economy? A shutdown will be in effect starting Friday night if Congress can't agree on a budget. Of course, the longer the government is shut down, the more devastation it could cause. At this point, however, many experts are predicting a short shutdown, possibly lasting just a few days. If the federal government was closed for weeks or months, then the economic impact could be significant across a variety of sectors and would be felt by most Americans. But how would the economy handle a shutdown of just a few days?

The Housing Market

Of all parts of the economy, the housing market remains the most troubled. A shutdown could make matters even worse for the sector, as housing finance is still heavily reliant on federal funding. But the impact of a short shutdown would likely be muted.

Only housing units funded by the Federal Housing Authority would be affected, according to an article at Politico. Those account for about 30% of new originations. The other 70% is mostly funded by Fannie Mae and Freddie Mac. Despite being controlled by the government, their operations are not expected to be impacted. The Treasury states that government mortgage modification efforts and other foreclosure prevention programs would not be affected by a shutdown.

If anything, the biggest problem that a government shutdown poses for the housing market is uncertainty. It could throw into question April's housing results and cast more doubt on the little progress the sector might experience in sales growth.

The Financial Markets

In a short shutdown scenario, financial markets won't be significantly affected. Federal regulators will largely go dark, but the Securities and Exchange Commission will keep some key functions live, according to a Wall Street Journal article. Market surveillance would continue, for example. The many important stability functions of the Federal Reserve would also be unaffected, since its budget is independent of the federal government. The Federal Deposit Insurance Corporation will also remain open to clean up the mess of any banks failing.

But again, uncertainty could be an issue. The government departments that calculate and release economic reports would close their doors during a shutdown. This would delay reports, leaving the market to wonder how the recovery is faring. Next week, the government is scheduled to release results for retail sales, manufacturing and trade inventories and sales, the trade deficit, and inflation.

Financial markets would have a huge problem to deal with if government interest payments on Treasury securities ceased during a federal government shutdown. But the Treasury says that these and its other essential payments would continue, no matter how long Congress takes to agree on a budget.

Federal Employees

If the federal government is shut down on Monday, then around 800,000 employees won't come to work, according to the Washington Post. These employees will be unpaid for whatever period of time the government is shut down. In other cases, however, like for active-duty military personnel, employees will be continue to be paid during a shutdown, but their checks will be delayed until the government starts back up.

These workers should have a minimal impact on the economy, however. A little bit of spending may be lost for those who go on forced furlough, but other spending would just be delayed for anyone whose pay is deferred until the shutdown ends.

In case you were worried about Congress getting paid, you'll be relieved to know that they won't go hungry. Their salaries won't grind to a halt just because they can't agree on a budget. That is, unless a bill passes before then that would stop their pay in a shutdown scenario. House Speaker John Boehner (R-OH) would support a measure to freeze their pay during a shutdown, reports the New York Times.

Social Services

Social services should be largely unaffected. According to a New York Times roundup on the effects of a shutdown, Social Security payments would continue. Medicare also has some rainy day funding that should cover at least a few weeks of costs. But the National Institute of Health would not admit new patients, and planned research projects would be delayed.

Welfare ("Temporary Assistance for Needy Families") will be unaffected, writes the Times. It is funded through September. Food stamps have a different fate. They're provided at the beginning of each month, so they'll be fine unless a shutdown lasts into May.

Finally, the federal government provides the funding for extended unemployment insurance benefits. These are very important to millions of long-term unemployed Americans who have exhausted the number of weeks states will provide unemployment insurance. The Treasury has the duty of providing states with the funds to pay extended benefits, and it has indicated that these payments will continue, even if the federal government shuts down.

Energy

The energy sector has little to worry about in a government shutdown. The Department of Energy will remain open, since its funding provides at least a few days cushion, according to the Washington Post. Moreover, power distribution would be unaffected, as it's considered an essential function, reports the Associated Press.

Taxes

Taxes are due on April 18th -- less than two weeks from today. Might a government shutdown provide procrastinators a little extra time? Unfortunately the Internal Revenue Service has no intention of letting political squabbling delay its due date, according to the New York Times. It says paper tax returns might not be processed as quickly, which could delay refunds. But the IRS intends to keep enough personnel on hand to process the money it's owed. So you might have to wait a little longer get money the government owes you, but the IRS won't wait to get the money you owe Uncle Sam.

The District of Columbia

The D.C. area's economy would be disproportionally affected by a shutdown. After all, federal workers are concentrated in the nation's capital. The local economy will be hurt, as temporarily out-of-work government employees will likely have to cut their spending. It will also affect tourism. National museums will close. This couldn't come at a worse time for D.C., as its tourist-magnet cherry blossoms are in bloom, and the annual Cherry Blossom Parade is set for Saturday. It may be canceled if a shutdown occurs, according to a Washington Post article that details a shutdown's effect on D.C.


You might have noticed that the stability of a number of the sectors and markets above depends on the government shutdown being a short one. If it extends a few weeks or months, then emergency funds that some federal agencies and departments have to get them through a shutdown scenario will be depleted. Moreover, if a shutdown wears on with no end in sight, uncertainty will increase in markets like housing and finance. So outside of D.C., the economic impact of a very short government shutdown doesn't seem too significant. But if divisive politics causes the shutdown to persist indefinitely, then it could be far more devastating to the recovery.

Image Credit: Jim Young/Reuters

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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