The Economic Impact of a Government Shutdown
Policy + Politics

The Economic Impact of a Government Shutdown

iStockphoto/The Fiscal Times

So a government shutdown is supposed to crush the economy. Every major player has sounded alarms about the downturn that happens without a spending measure in place by Monday night. It seems to be the one item in which President Obama, House Speaker John Boehner (R-OH), Sen. Ted Cruz (R-TX) all agree.

With the odds of the government closing, economists are cranking out their estimates of the possible financial impact. Since House Republicans passed their plan—which temporarily funds the government but eliminates Obamacare—the stock market has steadily plunged, with the S&P 500 index off by 1.77 percent.

The forecasting firm Macroeconomic Advisers based its projections on a two-week government shutdown causing 36 percent of federal employees to go temporarily without a paycheck. That translates into a 0.3 percent drop in the fourth quarter gross domestic product. By way of comparison, that’s slightly better than the quarterly impact of the sequestration budget cuts, according to Congressional Budget Office projections.

But Macroeconomic Advisers assumes that the government would then get back on track and that economic output would rebound in the first quarter of 2014 by 0.3 percent.

Mark Zandi, chief economist at Moody’s Analytics, told the Senate Banking Committee this week that a three to four-week shutdown would lop 1.4 percent off his projected 2.5 percent growth this quarter.

“And this likely understates the economic fallout, as it does not fully account for the impact of such a lengthy shutdown on consumer, business and investor psychology,” Zandi told lawmakers.

Scott Anderson, chief economist at the Bank of the West, pegs the impact of a weeklong shutdown at 0.2 percent of fourth quarter GDP.

“If a government shutdown were to drag on longer, say a month or so, the damage estimate increases into the 1.5 percentage point range,” Anderson said in a Friday client note. “Can you say economic stagnation? Longer than a month and GDP growth likely contracts in the fourth quarter and the risks rise significantly. It’s a scenario that at best delays any economic acceleration and at worst leads us down a path toward another recession.”