MOHAMMED EL-ERIAN: Please find below what I believe are
the four major consequences if this situation were to prevail for more
than a few days:
The Four Major Economic Effects of the US Government Shutdown
As
the political impasse and blame game drag into Day 3 of the US
government shutdown, economists and policymakers are assessing the
potential impact on the economy.
1. Impact on Aggregate Demand: The GDP Drag
With
hundreds of thousands of Federal employees on furlough (and nearly a
million affected in total according to some media reports), the
immediate economic impact is a potential reduction in disposable income.
Furloughed workers, facing delayed paychecks, may pull back on spending
for now.
- This income shock, which would disproportionately affect lower-income households, can create a drag on overall consumer demand.
- Simultaneously, government spending on non-essential services, contracts, and grants slows to a trickle. Having said that, see the Congressional qualification that follows in point 2.
2. Fiscal Position: More Ambiguous than Many Think
The
fiscal effect of a shutdown is often characterized as a government
spending cut. In reality, the financial impact is generally ambiguous as
the collection of tax revenue can also slow.
- Crucially, the effects are often only deferred, as Congress typically approves back pay once the government reopens (subject to another qualification — in point 4 below).
3. Loss of Economic Visibility: The Data Void
Economic
indicators, such as today’s monthly jobs report (non-farm payrolls) and
key agency surveys and data collections, are suspended. This data
vacuum limits the information that economists and policymakers have to
gauge the economy’s health.
- For a Federal Reserve that has consistently prided itself on being “data dependent,” this shutdown occurs at a time of potential inflection, forcing the Fed to operate with more limited visibility. The next crucial release, the Consumer Price Index (CPI) report, is currently scheduled for October 15th.
4. Risk of Permanent Downsizing
While
furloughs are generally temporary, the political debate leading up to
this government shutdown raised the specter of a permanent downsizing of
government employment, or what some have called DOGE 2.0. To the extent
that such permanent layoffs materialize, it would prolong the effects
on income and consumer spending mentioned above.
- This would transform what is typically an immediately reversible shock into a more persistent short-term headwind for the US economy.
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economic indicators on hold -
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