Shutdown-O-Nomics 2025
Once again, the U.S. government has shut down (since 1976, there have been 20 shutdowns). Beyond shuttered national parks and museums, there are plenty of direct and indirect financial consequences. Here are the questions that I have been fielding.
How Will Most Americans Experience the Shutdown? Federal workers will bear the brunt of the stalemate. During the 2018-2019 shutdown, which lasted 34 days, nearly 800,000 federal employees were either furloughed or were forced to work without pay. This time, CBO estimates about 750,000 employees could be furloughed each day; the total daily cost of their compensation would be roughly $400 million. Additionally, more than 1 million active-duty military personnel will likely forego pay during a shutdown. This time around, OMB has threatened mass firing of federal workers, which would increase the numbers. All government and military workers’ wages will eventually have to be repaid when the government reopens.
There is also a risk that small businesses that serve government workers could feel the pinch. Whether it’s the sandwich shop across from a government facility or a contractor that provides services to the government, a closure would cause financial harm, and unfortunately, these folks will not be made whole for any lost revenue during the period.
Are Impacted Workers Entitled to Unemployment? It depends. Some government workers may qualify for the Unemployment Compensation Program for Federal Employees (UCFE), which is administered by state unemployment insurance agencies. In general, state law determines eligibility.
I’m a Federal Worker-Without Pay, Should I Spend My Cash on Hand or Use My Credit Card? This is an emergency, so use that safety net first. If you deplete it, you may need a short-term lifeline to bridge the gap. Before you run up your credit card balance, consider a home equity line of credit or borrowing from your retirement accounts. DO notify credit card companies, landlords, mortgage servicers or anyone you owe money to if you think that you are going to be late or miss a payment.
What About Social Security, Medicare and Medicaid? All three are authorized through separate laws, so checks and benefits will continue to flow. Military pension benefits will be paid, and Veterans’ Hospital facilities are expected to remain open. Likewise for recipients of other benefits like the Special Supplemental Nutrition Program for Women, Infants, and Children (“WIC”), and Supplemental Nutritional Assistance Program (“SNAP”) benefits. However, enrollment in all of these programs could be delayed due to staff reductions.
Do I Get a Break on Tax Estimates or Student Loan Payments? No dice, the IRS fully expects you to pay your taxes, as does the Department of Education. If you use snail mail for these payments, the postal service is open.
The Housing Market Has Shown Signs of Life, Will the Shutdown Stop the Progress? A shutdown would mean that there will be no authorization for new policies offered by the National Flood Insurance Program (NFIP), which could impact closings. NAR estimates that this would put at least 1,300 property transactions per day at risk. Existing policies will remain in effect. There should only be limited impact on government-backed mortgages through Fannie Mae, Freddie Mac, Ginnie Mae, and FHA/VA, however, based on past shutdowns, there could be delays in processing loans.
What About Markets, Will a Shutdown Cause Investor Angst? For the first few days, investors seem to have taken the shutdown in stride. For government bond holders, know that unlike a debt default, a shutdown does not affect the government’s ability to pay its obligations, so you will continue to receive interest payments. Overall, a “shutdown is unlikely to make much impact on financial markets even if it drags on for some time,” says economist Jonas Goltermann of Capital Economics. That said, there could be big swings along the way.
How Does a Shutdown Affect the Federal Reserve? A shutdown could be an issue for the Fed, because the collection and dissemination of economic data could halt. That means that the September employment report and upcoming inflation reports may not be released. Without these data points, the central bank could rely on alternative sources, like the ADP National Employment Report, which showed that private payrolls fell by 32,000 in September, the third decline in the last four months. Or, the Fed could be more cautious and do nothing, or even choose to delay its next policy meeting later this month (October 28-29).
Could a Shutdown Cause a Recession? In the past, for every week of a shutdown, real GDP is reduced by about a tenth of a percent. The Congressional Budget Office analysis of the 2018-2019 shutdown found that the economy lost about 0.3 percent of growth, but after reopening, it then resumed its growth trajectory. If a shutdown were to last longer than weeks, or the Trump administration makes good on its threat to make permanent cuts to federal employment, the effects could be longer lasting.