For economic recovery, Congress must keep avoiding a shutdown
In recent times, the specter of a federal government shutdown has loomed large over the United States. It threatens not only immediate economic disruptions but also long-term economic stability. In November, the U.S. Congress passed a stopgap spending bill, averting an imminent government shutdown.
This bill, employing a laddered continuing resolution approach, extends funding for various federal programs through different dates. Some, like military construction and veterans benefits, are funded through mid-January 2024. Others, notably defense, have funding until early February 2024.
Understanding the immediate economic implications of a government shutdown is vital. As the Atlantic Council reports, a shutdown would halt most discretionary federal government spending. This accounts for about 27% of overall federal spending. Direct impacts on the U.S. economy would be significant. Government procurement of goods and services would pause, potentially lowering annualized quarterly GDP growth by 0.2% for each week the shutdown persists. Even a temporary contraction in government expenditure could send ripples through the economy. This affects everything from small business operations to large-scale infrastructure projects.
Moreover, the impact on federal employees cannot be overstated. A shutdown would lead to the furlough of hundreds of thousands of government workers. Past shutdowns have furloughed approximately 800,000 civilian workers. This year, an estimated 737,000 workers could face furloughs. The loss of income for these workers would have a trickle-down effect on consumer spending, potentially curbing economic activity at a crucial time. In terms of market confidence, a government shutdown could exacerbate volatility. While the extent to which a shutdown will impact U.S. and global stock markets is unknown, a shutdown will contribute an unhealthy level of uncertainty. This could undermine investor confidence and affect capital flows and investment decisions critical for economic growth.
On Wednesday afternoon, Federal Reserve chairman Jerome Powell signaled that inflation decreased more than the Fed projected, which will lead to interest rate cuts next year. Importantly, the Fed’s Summary of Economic Projections released Wednesday reports that the federal funds rate will be reduced by 75 basis points next year, which would lower the rate to about 4.6%. The Consumer Price Index (CPI) has shown a promising deceleration, contributing to the fact that inflationary pressures are easing more than anticipated. Last year, public and private economists predicted a recession this year, often referred to as a “hard landing.”
“The major takeaway from the December policy meeting is that the Federal Reserve is forecasting a soft landing,” wrote Joseph Brusuelas, chief economist for the accounting firm RSM.
A government shutdown’s disruption of economic data collection and publication hinders the Federal Reserve’s ability to assess economic conditions accurately. This is crucial for setting appropriate interest rates. In a climate marked by inflationary concerns and economic recovery efforts, the absence of reliable data could force the Fed to maintain higher interest rates to preempt inflationary risks. This may inadvertently slow down economic growth and recovery. It underscores the critical need for consistent government operations to provide the Fed with the necessary data for more growth-oriented monetary policy.
Indeed, the repeated political dysfunction in Washington has not gone unnoticed globally. Credit agencies have already responded negatively, with Moody’s lowering its outlook on the U.S. credit rating. The revised outlook reflects a growing concern over the ability of the U.S. to manage its fiscal affairs effectively. For an economy striving to maintain its global leadership, such perceptions can have far-reaching consequences.
Looking forward, it’s essential to consider what happens next. After Congress returns from the holidays, securing funding will be paramount. The recurring threat of shutdowns poses a significant risk to our economic health, constraining the Federal Reserve’s ability to manage inflation effectively. A concerted effort toward bipartisan cooperation in fiscal policy-making is essential. It is critical that Congress keep the wide-ranging economic impacts of a shutdown at the center of debate so that the Federal Reserve can maintain a balanced and growth-oriented economy.