Impending US government shutdown threatens economic stability

As the specter of the United States government shutdown looms large, economic experts are grappling with the potential repercussions for the nation’s economy. With approximately one-quarter of the U.S. Gross Domestic Product (GDP) tied to government expenditure, any significant reduction in this spending could trigger a cascade of economic effects.

Jared Bernstein, Chairman of the White House Council of Economic Advisers, warns that for every week the shutdown persists, there could be potential losses of 0.1 to 0.2 percentage points of quarterly economic growth. Goldman Sachs economists are even more pessimistic, estimating a 0.2 percentage point loss for each week of a shutdown.

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Should the shutdown extend to four weeks, Moody’s predicts a 0.4 percentage point reduction in the GDP. However, this figure is far from certain, as there is a compounding effect that could drive the economic downturn even further.

The worst-case scenario, a full quarter shutdown, could result in a staggering 2 percentage point reduction in GDP growth, according to Moody’s estimates. As economist Begley points out, this decline would be fueled by lost hours, wages, and productivity from federal government workers.

While some recovery is expected when back pay comes in for government employees once the shutdown ends, there will be a permanent loss of hours and wages for the approximately five million government contractors, with half of them expected to be impacted.

A prolonged shutdown also means fewer small business loans and a slowdown in the process of companies listing on the stock market, warned Gary Gensler, Chair of the US Securities and Exchange Commission. Such disruptions could further hinder economic growth.

In addition to these economic concerns, a second month of low consumer confidence in September adds to the uncertainties surrounding the situation. Furthermore, if the shutdown extends into the new year, an automatic one-percent cut in discretionary spending would be triggered, satisfying the demands of hardline Republicans.

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As the clock ticks down, the options to avoid a shutdown are dwindling. Congress must pass 12 appropriations bills annually to keep the government running, but this process is unlikely to be completed in time. A stopgap measure, known as a “continuing resolution” or CR, could provide temporary funding while work on the appropriations bills continues.

However, hardline Republicans oppose this short-term fix, arguing that it harms the economy. Despite Friday’s House of Representatives vote rejecting the stopgap measure, House Democrats are pinning their hopes on a bipartisan stopgap that might emerge from the Senate.