If Congress is unable to reach a budget deal on Friday, the federal government would close all non-essential operations at midnight when the current stop-gap funding measure expires. It would be the 18th time the government has endured a full or partial shutdown since 1977.
How could a shutdown affect an already struggling economic recovery? While economists agree that a brief shutdown that lasts only a few days would have a negligible impact on the GDP, there’s significant debate about what a longer closure would mean.
Some estimate that a week-long shutdown would trim the GDP by as much as a 0.8 percentage point during the first quarter, while others say it will be closer to 0.2 percentage point.
Macroeconomic Advisors has created a “shutdown calculator”—it’s really a table—that analyzes the risk to GDP depending on the length and extent of the shutdown.
In what may be the best-case scenario for a one-week shutdown—in which 36 percent of civilian compensation and 100 percent of defense spending on intermediate services are affected--the GDP is reduced by a 0.18 percentage point for the first quarter. In the worst (“highly unrealistic”) calculation for a shutdown that affects everything, GDP for the quarter would be shaved by a 0.58 percentage point.
Here’s the Macroeconomic Advisors chart:
What are some of the other risks to the economy and to financial markets?
The Federal Reserve would remain open (it doesn’t rely on Congressional funds), but it’s unclear what will happen to other parts of the government with regulatory functions over business.
The Department of Justice and the Federal Trade Commission may have to pause antitrust reviews—meaning that some mergers and acquisitions could be frozen. And while the Securities and Exchange Commission has said it would continue some market enforcement and surveillance operations, other operations would be curtailed. As a result, new issues of bonds and stocks and initial public offerings could be delayed.
CNBC’s John Carney argues that “a government shutdown could shut down Wall Street.”
“If Wall Street were unable to perform many of its functions for weeks, it could impact revenues this quarter,” Carney wrote in an analysis.
The ripple effects of a shutdown could dampen confidence in the United States as place for foreign investments, which would be bad news for the dollar. The dollar has already been losing ground this week to rivals (except the yen) as the threat of a shutdown grows.