The unprecedented government shutdown will weigh on a US economy already under stress

WASHINGTON (AP) — The six-week government shutdown that came to an end late Wednesday will be another drag on an economy already facing many challenges, though the full impact will take months to measure.

About 1.25 million federal workers haven't been paid since Oct. 1. Roughly 10,000 flights have been cancelled since last week and disruptions will continue, the officials say, even as air traffic controllers return to work. Government contract awards have slowed and many food aid recipients have seen their benefits interrupted.

Most of the lost economic activity will be recovered when the government reopens, as federal workers will receive back pay. But some canceled flights won't be rebooked, many canceled restaurant reservations won't be made again, and some postponed purchases will never happen.

The shutdown also cut off the flow of economic data on jobs, inflation, and consumer spending, which could lead the Federal Reserve to skip what had been an expected interest rate cut at its next meeting in December.

“The shutdown has been harmful to the U.S. economy and to critical data collection about employment, prices and more," said Heather Long, chief economist at the Navy Federal Credit Union.

The Congressional Budget Office estimated that a six-week shutdown will reduce growth in this year's fourth quarter by about 1.5 percentage points. That would cut growth by about half from the third quarter. The reopening should boost first-quarter growth next year by 2.2 percentage points, the CBO projected, but about $11 billion in economic activity will be permanently lost.

The previous longest government shutdown, in 2018-2019, lasted 35 days but only partially shut the government because many agencies had been fully funded. It only nicked the economy by about 0.02% of GDP, the CBO said then.

This year's shutdown adds to the economy's existing challenges, which include sluggish hiring, stubbornly elevated inflation, and President Donald Trump's tariffs, which have caused uncertainty for many businesses. Still, few economists foresee a recession.

Here are the ways the government closure has weighed on the economy:

Missed paychecks

All told, federal workers missed about $16 billion in wages, the CBO estimates. That has meant less spending at stores, restaurants, and likely reduced holiday travel. Large purchases will probably be postponed, slowing the broader economy.

Trump had threatened during the shutdown to not provide back pay but the deal struck in Congress would replace those lost wages once the government reopens.

The shutdown has added to the Washington, D.C. area's economic woes, where the unemployment rate was already 6% before the shutdown, after Trump's cuts to the federal workforce this spring. While the Washington, D.C. area — including the nearby suburbs in Virginia and Maryland — has the highest concentration of federal workers, most live and work outside of the nation's capital.

Federal workers make up about 5.5% of Maryland's workforce, according to the Bipartisan Policy Center. But they also comprise 2.9% of New Mexico's workers, 2.6% of Oklahoma's, and 3.8% of Alaska's.

Then there are the federal contractors. Bernard Yaros, an economist at Oxford Economics, estimates they could total as many as 5.2 million, and they are not guaranteed back pay once the shutdown ends.

Interest rate cuts

The government shutdown cut off the flow of economic data on unemployment, inflation, and retail spending that the Federal Reserve depends on to monitor the economy’s health. Even as the government reopens, some of that data may not ever be reported, while other data will be delayed. As a result, the Fed may not deliver a third interest rate cut at its December meeting, which was widely expected before the shutdown.

“What do you do if you’re driving in the fog? You slow down,” Fed Chair Jerome Powell said at a news conference late last month.

Powell said the Fed’s interest-rate setting committee is deeply divided over whether to reduce its key rate, partly because the economy’s health is unusually cloudy right now. The government has missed two monthly jobs reports and the October inflation data, scheduled to be published Thursday, will likely never be issued.

On Wednesday, Susan Collins, president of the Federal Reserve Bank of Boston, said that the lack of economic data is one reason she is “hesitant” to support another rate cut next month. Collins has a vote on the Fed’s interest-rate setting committee.

Fewer rate cuts could discourage borrowing and spending and weigh on the economy in the coming months.

Flight disruptions

Airlines have scrapped more than 10,000 flights on orders from the Federal Aviation Administration, which is attempting to reduce the burden on overworked air traffic controllers who have now missed two paychecks.

Even before the flight cancellations, Tourism Economics, an economic consulting firm, estimated that the shutdown would reduce travel spending by $63 million a day. That means the six-week standoff cost the travel industry $2.6 billion.

Consumer sentiment

The shutdown has worsened Americans' outlook on the broader economy. Declining consumer sentiment can over time reduce spending and slow growth, though in recent years Americans have kept shopping even when their outlooks turned grim.

Consumer sentiment dropped to a three-year low and close to the lowest point ever recorded last week in a survey by the University of Michigan, with pessimism over personal finances and anticipated business conditions weighing on Americans.

The November survey showed the index of consumer sentiment at 50.4, down a startling 6.2% from last month and a plunge of nearly 30% from a year ago.

Federal spending

While the shutdown hasn't cut off all federal government spending, it has reduced purchases of equipment and has cut off the issuance of new contracts.

Yaros estimates that about $800 million in new contracts were at risk of not being awarded each day of the shutdown.

“The federal award spigot has all but turned off at the Department of Defense, NASA, and the Department of Homeland Security,” Yaros wrote.

SNAP benefits

The shutdown delayed the payment of $8 billion in monthly SNAP food aid to 42 million recipients in November, creating a significant financial disruption for many households that likely reduced spending.

It's still not clear how soon all the benefits will be paid this month, though the government says they could be paid as soon as Thursday in many states.

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