AP reader question: How might the federal shutdown affect the economy?

Key Points

• The current federal shutdown, initiated by President Trump, poses a risk of potential permanent job losses for thousands of government workers, which could destabilize an already fragile economy.
• Short-term economic impact from the shutdown is expected to be minimal, with financial markets likely bouncing back quickly if funding is restored shortly.
• While federal workers may face furloughs, they typically receive back pay when funding resumes, resulting in a neutral effect on overall spending.
• Significant disruptions, particularly in critical sectors like air travel, could lead to more severe economic consequences, but past shutdowns have shown negligible effects on GDP.

Here’s a question about the shutdown submitted by an Associated Press reader, Ryan S.:

How might the shutdown affect the U.S. economy?

Shutdowns of the federal government usually don’t leave much economic damage. But the one that started Wednesday looks riskier, not least because President Donald Trump is threatening to use the standoff to permanently eliminate thousands of government jobs, and the state of the economy is already precarious.

For now, financial markets are shrugging off the impasse as just the latest failure of Republicans and Democrats to agree on a budget and keep the government running.

Let’s take a look at a range of possible economic effects:

1. A couple of days: Financial markets may experience some fluctuation, but that likely won’t be significant if funding is restored before too long. Workers will get paid back, and ideally there’s not much of an economic lag.

2. Longer term: Federal workers get furloughed and the federal government delays some spending during a shutdown. But when the funding comes back, workers go back to their jobs and collect back pay, and the government belatedly spends the money it had withheld. It’s pretty much a wash.

3. Very long term: If there are significant disruptions to sectors like air travel due to shutdown-related circumstances — like the security screeners and air traffic controllers who called out sick during the 2018-2019 shutdown — that can mean more trouble for industries. But even in that 35-day shutdown, the longest in U.S. history, the Congressional Budget Office estimates that just 0.02% was shaved off 2019 U.S. gross domestic product, the nation’s output of goods and services.

Also: Trump has threatened to permanently eliminate thousands of government jobs during this shutdown, so if that happens, and new tranches of people are immediately out of work, that can upset an already precarious economy. We just don’t know yet if those layoffs will happen.

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