The economic consequences of the current federal government shutdown hinge critically on how long it lasts. If it is resolved quickly, the costs will be small, but if it drags on, it could send the U.S. economy into a tailspin.
That’s because the economy is already in a precarious state, with the labor market struggling, consumers losing confidence and uncertainty mounting.
As an economist who studies public finance, I closely follow how government policies affect the economy. Let me explain how a prolonged shutdown could affect the economy — and why it could be a tipping point to recession.
Direct impacts from a government shutdown
The partial government shutdown began Wednesday, as Democrats and Republicans failed to reach a deal on funding some portion of the federal government. A partial shutdown means that some funding bills have been approved, entitlement spending continues since it does not rely on annual appropriations, and some workers are deemed necessary and stay on the job unpaid.
While most of the 20 shutdowns that occurred from 1976 through 2024 lasted only a few days to a week, there are signs the current one may not be resolved so quickly. The economy would definitely take a direct hit to gross domestic product from a lengthy shutdown, but it’s the indirect impacts that could be more harmful.
The most recent shutdown, which extended over the 2018-2019 winter holidays and lasted 35 days, was the longest in U.S. history. After it ended, the Congressional Budget Office estimated the partial shutdown delayed approximately $18 billion in federal discretionary spending, which translated into an $11 billion reduction in real GDP.
Most of that lost output was made up later once the shutdown ended, the CBO noted. It estimated that the permanent losses were about $3 billion — a drop in the bucket for the $30 trillion U.S. economy.
Indirect and more lasting impacts
The full impact may depend to a large extent on the psychology of the average consumer.
Recent data suggests that consumer confidence is falling as the stagnation in the labor market becomes more clear. Business confidence has been mixed as the manufacturing index continues to indicate the sector is in contraction, while other business confidence measures indicate mixed expectations about the future.
If the shutdown drags on, the psychological effects may lead to a larger loss of confidence among consumers and businesses. Given that consumer spending accounts for 70% of economic activity, a fall in consumer confidence could signal a turning point in the economy.
