When Congress returns from recess after the Labor Day holiday, they have a lot of high-stakes deadlines to resolve. First on their list: to extend funding for government agencies and raise the nation's debt ceiling. Otherwise, the government shuts down, and once again Congress will leave Washington, and with it, the Republican strategy to rewrite the federal tax code in an effort to rescue their struggling legislative plans will be sidelined.

S&P Global Ratings U.S. economics team continues to see the likelihood of a shutdown in late September as slim, with the crisis from Hurricane Harvey further reducing the chances. But betting on a rational U.S. government can be risky. With that in mind, assuming that the government crosses that line, S&P Global economists estimate that a shutdown could shave approximately 0.2 percentage points, or $6.5 billion, off of real fourth-quarter GDP growth for each week it drags on. If a shutdown were to begin later in the fourth-quarter, the hit to quarterly GDP growth would be even larger. But, since this shutdown would potentially happen at the start, some initial losses would be regained once government facilities are back in operation. Other economic activity, however, including lost productivity from furloughed government employees, would not be recovered.

At first blush, chances of a shutdown seems highly unlikely, given the administration is Republican and the GOP holds majorities in both the House and the Senate (albeit, slim ones). However, the recent comment by President Trump at the Arizona rally on Aug. 22--"If we have to close down our government, we're building that wall," referring to the proposed Mexican border wall--and reiterated by the White House on Aug. 24, has raised the specter that a shutdown is looming at the end of September. At the same time, a debt-ceiling impasse would leave the Treasury with insufficient cash to meet all financial obligations, making a very bad situation much worse.

Although lawmaker Paul Ryan doesn't think that "anyone is interested in a shutdown," the president can veto any spending bill that reaches his desk, ultimately forcing closure of the government. Conversely, Congress may have the incentive, and enough votes, to override a presidential veto in order to avoid a shutdown.

Our analysis is, in part, based on the experience of the back-to-back shutdowns of almost four weeks that happened during the Clinton Administration in 1995-1996 and the more recent 16-day shutdown during the Obama Administration in October 2013. While the Bureau of Economic Analysis (BEA) said that the full effects of the partial October 2013 shutdown can't be quantified, they 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.)

The Butterfly Effect

The BEA estimated only the direct impact of the shutdown. But, since the government touches almost every aspect of the economy, the full effect of a shutdown would likely be much larger. A disruption in government spending means no government paychecks to spend at the mall, lost business and revenue to private contractors, lost sales at retail shops, particularly those that circle now-closed national parks, and less tax revenue for Uncle Sam. That means less economic activity and fewer jobs. We expect something in line with the Council of Economic Advisors (CEA), which earlier estimated that 120,000 fewer private-sector jobs were created during the first two weeks of the 2013 shutdown.

Ironically, a possible shutdown will add to the budget deficit, because it's costly to stop and start programs. Based on the total cost of furloughed federal workers, the 16-day shutdown in 2013 cost the U.S. government at least $2 billion, according to the Office of Management and Budget (OMB), while the two 1995-96 shutdowns cost the U.S. government $1.4 billion ($2.2 billion in today's dollar).

A shutdown will initially slow GDP, because the output lost when hundreds of thousands of government workers are furloughed subtracts directly from GDP. And, with each day the shutdown drags on, federal workers may start to pull back on household spending, at restaurants, childcare, or retail stores because of worries that they won't get paid anytime soon. That's almost 1 million people who won't be getting regular paychecks.

Yet the economic impact of the shutdown goes beyond the federal workforce.

Private contractors who depend on government sales will lose business. During the 2013 shutdown, according to a National Association of Government Contractors survey, 29% of members said that, as a result of the stalemate, they planned to delay hiring. Fifty-eight percent said it would have a negative effect on their business. As contractors delay project, reverberations will be felt throughout the spending chain. This will likely have a ripple effect that spreads through to the economy more broadly.

Vacations and school trips will likely be curtailed when hundreds of national parks and monuments are closed for business. (Even the Panda Cam at the Smithsonian will be under lock and key.) With national parks spread across the U.S., closing these sites does not just mean lost ticket sales. Many regional economies depend almost entirely on visitors to nearby national parks. Those visitors eat at their restaurants, stay at their hotels, and shop at local businesses. That creates jobs, which may no longer be needed if a shutdown drags on.

The End of Days

Businesses don't want to invest during periods of uncertainty, and households will likely delay spending. We saw huge effects during the U.S. debt ceiling crisis in the summer of 2011, with consumer confidence hitting a 31-year low in August, and third-quarter annualized real GDP growing just 0.8%. Given that this round of debt-ceiling negotiations will happen amid government shutdown threats, the hit to the economy could be even more severe.

This all is a prelude to the Treasury Department's hitting the debt ceiling on Sept. 29, 2017, one day before the expiration of the bipartisan spending agreement to fund government agencies. With markets somewhat jittery about a possible selective default of the U.S. sovereign, worries of a shutdown threat only adds to their concerns. The shutdown and the looming debt ceiling combined could significantly hurt business and consumer sentiment, as well as the overall economy. Government disarray leaves GOP lawmakers' hope to approve a compressive tax plan, or even our expectation for a modest tax cut, by early next year, now seem like wishful thinking.

While we believe the Senate will pass its deal to raise the debt ceiling, the impact of a default by the U.S. government on its debts would be worse than the collapse of Lehman Brothers in 2008, devastating markets and the economy.

Should a default occur, the resulting sudden, unplanned contraction of current spending could see government spending cut by about 4% of annualized GDP. The economy would fall back into a recession, wiping out much of the progress made by the recovery.

Finally, the economists at the Federal Reserve, whose monetary policy is now "data-driven," will no longer have government economic reports, such as the Bureau of Labor Statistics' jobs figures, that they need to understand what's going on in the U.S. economy. The length of time that the central bank is without data could add more uncertainty to the Fed's decision that an economic recovery is making progress and cause members to push out the start of the tapering. And with the risk of a government shutdown as we head toward the debt ceiling increasing, the Fed will be more cautious. While we still expect the Fed to announce plans to gradually unwind its balance sheet, their likely plans to delay interest rate hikes until next year will be even more justified. In turn, the economists at S&P Global, like those from across a multitude of sectors, may be forced to re-examine our forecast for the U.S. and the prospects for potential long-term economic growth.

According to the OMB, the last three government shutdowns already cost the federal government over $4.25 billion, when we adjust for inflation. These numbers don'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 is closed. While we at S&P Global Ratings continue to see the likelihood of a shutdown in late September as slim, the risks are increasing, with the costs high.