'Twas the night before shutdown

Summary

• The federal government is careening towards a government shutdown as we go to print, with Congress still struggling to pass a bill that would fund the government beyond December 20. But what is a government shutdown, and what are the potential economic implications of one?

• A government shutdown only impacts the 25% or so of federal spending that is characterized as "discretionary." "Mandatory" spending, such as outlays for Social Security, Medicare and Medicaid, is not part of the annual appropriations process and thus generally continues unabated.

• During a government shutdown, unfunded federal agencies must discontinue non-essential functions. Essential services, such as those related to public safety or national security, continue to operate.

• Civilian federal employment is roughly 2.3 million, and active duty military personnel account for another 1.3 million. Federal government employees deemed "essential" continue to work during a shutdown, but they do not receive pay. "Non-essential" employees are furloughed and their activities cease. All workers receive back pay after the shutdown ends.

• Past government shutdowns are instructive for assessing the potential economic impact. The direct hit to economic growth in the 2013 and 2018–2019 government shutdowns was a relatively modest few tenths-of-a-percentage point. GDP growth rebounded by a similar amount once the shutdown ended. That said, not all the lost economic activity was recovered in full, and the indirect hit to the economy is more difficult to measure yet nonzero.

• A shutdown could delay influential economic data reports published by government agencies. Following the 16-day government shutdown in 2013, the Department of Labor's monthly Employment Situation and Consumer Price Index reports, among others, were delayed by about two weeks. Collection, processing and publication delays stretched into the following month as well.

• The current government shutdown episode has roots in September. Lawmakers were unable to pass any of the 12 appropriation bills by the start of fiscal year 2025 on October 1, and as a result they resorted to a continuing resolution (CR) that extended current government funding until December 20.

• Congress seemed poised to pass a bipartisan agreement for another CR that would extend government funding again, this time through mid-March, but that effort has been derailed due to opposition over a number of policy riders, including but not limited to disaster aid, agriculture subsidies, health care policy changes and a potential debt ceiling increase. Without another CR, a government shutdown will begin at midnight tonight.

• Economic disruption from a prolonged government shutdown and an extended delay of key government data releases would inject additional uncertainty into the policy outlook and, by extension, the economic outlook. Furthermore, even if a CR is passed in the next few days that averts most of the costs of a shutdown, another budget fight in the first quarter of next year seems likely.

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