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U.S. Government Shutdown Update No Gain, More Pain

New York, Jan. 11 2019 — Since closing its doors at midnight on Dec. 21, the U.S. government remains shut down. Based on our analysis, the U.S. economy will have lost $3.6 billion dollars by Friday, Jan. 11. It will only take another two weeks to cost the U.S. economy more than the $5.7 billion that the White House requested for the border wall.

S&P Global Economics earlier estimated that a selective shutdown would have a modest impact on the $19 trillion economy in real terms. We found that, with only about 25% of the government still needing funds, the potential impact from a shutdown would be even more limited. We estimated that this shutdown, now the second longest in U.S. history, could shave approximately $1.2 billion off real GDP in the quarter for each week that part of the government is closed (see "Just In Time For The Holidays: A Possible U.S. Government Shutdown ," published Dec. 20, 2018). Based on our analysis, the U.S. economy will have lost $3.6 billion dollars by Fri., Jan. 11. That may seem like pennies for the world's biggest economy, but it means a lot to those workers trying to cover their household costs without their paychecks.

And the clock is ticking.

How big a jolt a shutdown causes the economy depends on how long the government is closed. While not in our estimate, we expect that the weekly costs will widen beyond the average weekly cost of $1.2 billion as the shutdown ages. It will be the longest in history at 22 days on Sat., Jan. 12. The longer this shutdown drags on, the more collateral damage the economy will suffer. Ironically, based on our analysis, it will only take another two weekzsbefore the cost of the shutdown would be more than the $5.7 billion requested for the proposed southern wall.

The impact from a shutdown has both direct and indirect economic costs. Indirect costs include canceled vacations to national parks, museums, and monuments that are closed, or lost business to contractors that do jobs for Uncle Sam. While a short shutdown may not change business plans, a longer one could force some to reduce staff, extending the pain.

Indeed, companies that earn a living around national parks and monuments may have woken up on Dec. 22 to find table reservations cancelled and hotel rooms empty this holiday season. With government sites closed, such as the Smithsonian Institute or National Zoo, people may cancel their vacation plans, costing the government fee revenue, and restaurants and hotels, which thrive off these visitors, lost revenue, which increases chances that they will need to cut back on staff. With Christmas considered to be the busiest tourism season of the year, these losses were likely especially painful.

Contractors that do business for Uncle Sam may need to reduce staff as well, removing a bit of money from the pockets of private citizens across the U.S. The partial closure of the Securities and Exchange Commission (SEC) means that companies that were planning to file an IPO in January will have to wait for another day when the SEC is back in operation. While government workers will likely recoup their lost wages once the government opens, as they have in the past, the many government contract workers who are out of work because of the shutdown are unlikely to get back pay. Workers who are living paycheck to paycheck will struggle to make ends meet the longer this goes on. As the standoff drags on, no paychecks are arriving to refill their savings, pay down credit card debt, make that mortgage payment, or pay their rent.

Americans still need to file their income taxes by April 15, whether or not the government is open. But the Internal Revenue Service (IRS) has furloughed employees in charge of collecting back taxes. That will deprive the government of revenue. The Trump administration has taken steps to send out IRS refunds in spite of the government shutdown, which will alleviate some of the squeeze on households across the U.S. that may have other plans for that big refund than having it sit in Uncle Sam's account. If that happens, the many consumers who treat their tax overpayments like a savings account and depend on those refunds to meet expenses early in the year will likely make a collective sigh of relief. However, it still seems unclear whether the IRS can legally dispense refunds when Congress has not appropriated the money. But what lawmaker wants to be the one who tells taxpayers that they'll just have to wait?

While some indirect costs may be regained once the government reopens, direct costs from the U.S. government closing shop are lost forever. Economic

activity from lost productivity from furloughed government employees won't be recovered. While the Bureau of Economic Analysis (BEA) said that the full effects of the partial October 2013 16-day shutdown can't be quantified, it estimated that the direct effect from lost hours worked by federal employees reduced fourth-quarter GDP by 0.3 percentage points. (The BEA earlier estimated that one-third of the 11.9% decline in federal spending and investment in the fourth-quarter 1995 GDP report was due to the shutdowns of the federal government in mid-November and late December.)

As in previous shutdowns, the productivity lost from furloughed government workers will never be regained. In real terms, GDP will be lower since no "product" was created. However, furloughed government employees do usually get paid (with taxpayer money if Congress decides to compensate them afterwards), so the shutdown would have no effect on nominal GDP and by extension would add to inflation in the first quarter.

Turning the government off and on comes with a cost. Indeed, even last January's "weekender" shutdown wasn't without costs. Based on estimates adjusted for inflation, the three earlier government shutdowns (in 1995, 1996, and 2013) cost the federal government a chunk of cash well into the billions. This doesn't begin to account for lost federal-worker productivity and lost trust in the federal government, not to mention lost economic activity (and lost taxes) on money never spent by businesses and households while the government was closed. Even last January's shutdown, which amounted to a long weekend, as everyone returned to work on Tuesday once Congress reached an agreement that Monday, had this effect, even if that could be counted in the millions, not in billions. The third shutdown of 2018 will be no different.